UNIVERSITY OF PORT HARCOURT

BEYOND THE BANKRUPTCY OF THE

DISMAL SCIENCE

An Inaugural Lecture

By

Professor T. J. Agiobenebo B.Sc. (ABU); M.A., Ph.D. (Pitt)

AN INAUGURAL LECTURE SERIES NO. 69

24 JUNE, 2010.

i

Introduction

Protocol

Pro-Chancellor, Sir

The Vice Chancellor, Sir

Members of Council here present

Principal Officers of the University here present

Provost, College of Health Sciences

Deans of Graduate School and Faculties

Distinguished Professors

Heads of Departments

Dear Colleagues

Distinguished Guests

Gentlemen of the Press

Staff and Students of Unique Uniport

Ladies and Gentlemen

It is indeed with great honour, sense of humility and

responsibility that I stand before you, this day, to deliver this

lecture, which is the fourth in the series of inaugural lectures

from the Department of Economics at this University. I have

the pleasure of welcoming you who have come from far and

near to assist in celebrating a belatedly inaugural lecture.

ii

Acknowledgements

Vice Chancellor, Sir, please permit me to acknowledge

my indebtedness to the many people that had helped in their

various ways to midwife this day. It is when I sat down to

write this lecture that I came to realise how indebted I am to so

many people known and unknown. Even the known list is so

large that I am forced to be selective. So, if I fail to

acknowledge you explicitly, it does not in away mean that I do

not profoundly appreciate your contributions. More

importantly, I have come to regard you all as true friends that

have not only left footprints in the chapters of the book of my

life but also in my own heart.

First among them is of course the Vice Chancellor for

giving me the opportunity to present this inaugural lecture,

thank you, Sir.

The lecture is dedicated to the sweet memory of that

singular woman who had the first right to refuse this day but

graciously did not – the Late Madam Lillian March Jimsele

Agiobenebo.

I thank the orator for his favour.

My sincere and deep depreciation goes to the memory

of Chief (Sir), Senator (Dr) Francis J. Ellah, a Permanent

Secretary I served in the capacity of a Messenger and a

Registrar, I served as a Clerical Assistance on secondment;

whom I never knew was watching my activities, assessing my

potentials and believing firmly in me and gave me the

unsolicited environment that allowed me to combine work and

study conveniently.

I would also like to thank a former Vice Chancellor of

this University, Professor (Sir) Sylvanus J. S. Cookey. I was

once again at one of those cross roads in my life; where the

doors for finishing my doctoral programme at the University of

Pittsburgh were all closing against me such that I was forced to

iii

change job from the Rivers State University of Science and

Technology to the University of Port Harcourt when the Staff

Development Policy of this University had changed in

response to changing economic and funding landscapes but

who had the administrative will to give me a Staff

Development Award despite the challenges that enabled me to

finish my doctoral programme at the University of Pittsburgh.

Without this award, this day might not have been. I will ever

remain grateful.

I don’t know how to thank the family of Late Professor

Jerome C. Wells, his wife, Nancy and little David then. It was

Jerry that called me at the end of my final examinations at the

Ahmadu Bello University, where he was a Visiting Professor

of Economics and said to me “you are one of our best students;

you will do well in an American University, think of doing

graduate work in America”. I had more than one admission

offers. But, when I sat down to make the decision as where

exactly to go, something in me advised, if you are going to a so

faraway place, go to where you know someone. So, I choose

Pitt and this decision saved my life and family. It was Jerry

and Nancy that took care of me in my first term at Pitt, winter

1979. I thank them immensely, despite the fact that I had a

State Government Scholarship and a Staff Development

Award from the then Rivers State College of Science and

Technology.

I am also very grateful to the Authorities of the

University of Pittsburgh for the fellowships they gave me that

enabled me to complete my course work for my doctoral

programme at the University.

The group of five to whom I also owe a deep

appreciation is my Dissertation Committee at Pitt, namely,

Professor Jerome C. Wells of blessed memory (Chairman);

Professor Gene Gruver (Co-Chairman); Professor Asatoshi

Meshiro; Professor Janet Chapman; and Professor Saul Katz,

iv

they guided me in the most diligent way a student should be

guided as a team and I remain grateful to them.

I am indebted to my senior colleague, friend and

mentor, Professor C. S. Nwodo for helping me even with the

title of this lecture and to Professor Francis D. Ukaigwe and

many others friends for all their love and support.

To Professor Augustine Ahiazu whom I met at his

Advanced Evening Classes that I couldn’t even pay for

regularly but who noticed me and would come around my

place in Mile 1, Diobu to wake me up from sleep, and say to

me “wake up, your mates are professors in the universities and

you are here sleeping, wake up, go and read”, I remain

grateful.

There is this special person, who started it all, whom to

my friends I have presented as my God Father. Our paths

crossed by the incidence of my double promotion from

Standard 4 to 6 in 1963 and we became inseparable ever since.

He is the Angel that was sent at the end of the Nigerian civil

war to give me direction. We have not seen or heard from each

other since the Fall of Grand Bonny, perhaps believing that the

other was lost to the war. Then, one precious day he appeared

and I asked if he was a ghost or real. He replied he is real and

that he has come for me. I should not stay at home. He has two

rooms in Port Harcourt and a job with Nigerian Airways; we

will go to night school in Port Harcourt. This very special

individual in the book on my life is Chief Dokubo Obu

Igbanibo, I will ever remain grateful.

How does a man thank his family that has made so

much sacrifice as mine? To that singular woman who had

singled mindedly sailed with me through the rough seas of life

on this planet, who I had always looked upon as my soul mate

and a widow of living husband – my wife, Mrs. Ada

Tamunopriye Agiobenebo, I say I can’t thank you enough for

your immeasurable love. To my children, whose cries, smiles

v

and laughter are all tonics for the struggle to this height. And

can I leave out my grandchildren who have increased the

Agiobenebo clan but also brought me new hopes and joy. I

thank you all for the various ways you have seen me to this

moment.

My ultimate gratitude goes to the Supreme One, the

Author of life for the gift of life itself; for all that has been and

has not been and for all that will be and will not be in this life

time and into eternity.

1

The Nature of this Lecture

Inaugural lectures may be defined variously but the

recognition of two things prove to be the running thread,

namely, it announces the arrival of scholar at a position of

leadership having been given a chair in his/her field and to

announce his/her next trajectory (trajectories), i.e. to explore

the frontiers of the distance between the known and unknown

of his/her own universe of work. This lecture is slightly

different. It has come so late in time that it does not fit directly

into the orthodox description of an inaugural lecture. So, I

shall use it to recognise that I have earned a Chair in my

discipline and to report on the trajectories that I have walked

so far and may continue to explore.

The Origins of Economic Science

The Seven Days of Creation Story

Insert multi-media clip here

Vice Chancellor, Sir, all other protocol duly observed,

the title of my lecture is not the economics of religion; not

even the economics of creation but “Beyond the Bankruptcy of

the Dismal Science”. I am acutely aware that religion and

economics are not strange bedfellows.1 The video clip you

have just watched is to motivate what I am going to present to

this august gathering as the “fourth science”. I deny that the

first, second and third sciences I know. My observations

regarding the manifestations on our planet tend to have varied

composition of physical, chemical and biological elements.

Unfortunately, however, I have no measurement of the

proportions and worse still the proportions seem to be relative

rather than absolute; and vary widely across the species;

1 After all, capitalist market economy can be traced back to the Caliphate where the first

market economy and earliest forms of merchant capitalism took root between the 8th-12th centuries (see http://en.wikipedia.org/wiki/Ancient_economic_thought).

2

therefore, I am unable to order them.2 Yes, one can still hazard

a guess but that would only be controversial, so the matter is

rested.

For the purposes of this lecture the creation story as

given in King James Version of the Bible is taken for granted.3

The insight from the video clip is that economics had been

there since the beginning of creation and we all have used it,

interpreted it and discussed it in own various ways. The

reasoning is simple. All the effort at creation would have come

to naught if there is no evolution. Now, there shall be no

evolution if there is no sustenance. There can be no sustenance

if there are no resources. However, the existence of resources

is necessary but not sufficient for evolution to take place, in

particular sustainably; since, evolution requires sustainability

to be meaningful and economic. If the resources required are

finite and depletible in nature that is even if just one of them

exhibits these properties, then management of the carrying

capacity of the “Garden of Eden” is imperative. For the

purposes of this lecture, the Garden of Eden is not larger than

planet Earth.4

Noah’s ark is a regional sample of the Garden of Eden.

The reason for the regional perspective of the Ark is obvious.

The human races seemed to be subsumed in the Jewish race

(perhaps presumed a representative sample). Further, it is

tempting to ask why Noah limited his saving of the species to

just the reproductive couple of each specie? This puzzle may

simply be resolved as a commandment of God. But, it is

2 I understand that for quite a number of people (example Samuel Brittan (2003), physics is the father/mother and prime science and that only the natural sciences are sciences. 3 I am aware that there are other versions of the story of creation, but this version is adequate

for the purpose of this lecture. 4 I am aware that other planets exist, after all, the Moon has been landed and there are

scientific explorations into its habitability. Those possibilities when they become realities can

only shift the constraint of carrying capacity forward but even with that there will always be upper boundaries.

3

intriguing that he did not even attempt to save any of the plant

species. My suspicion is that he was constrained by the

carrying capacity of the Ark. The carrying capacity even when

conceived as a moving variable will always have a finite upper

limit in time and space. Once an upper limit is admissible,

management of the carrying capacity becomes imperative. It is

possible that the frontier of the constraint might be shifted

outwards from time to time by new discoveries in space (new

locations with deposits of resources), science and technology

and innovations in management but it will always be there.

Economists usually represent the upper limit by the production

possibility frontier as shown in Figure 1b.

The situation in Noah’s Ark exemplifies the source of

the worries of Anyanwu (2009) in his “Population

Interactions” and the six broad categories of competition that

Figure 1a: Noah’s Ark

Source: Circulated from the Internet at the University of

Botswana (2005)

Figure 1b: The Production

Possibility Frontier

PPF

4

characterise them and their implications as well as Nyanayo

(2008) worries over the environment and biodiversity.

The Evolution of Economics

The study of the evolution of economics is essentially a

study of the history of economic thought and methodology,

which deals with different thinkers and theories of the subject

that became political economy and ultimately economics from

the ancient world to the present day. Understanding the history

of economic analysis, even if in an outline form, will be

helpful in understanding the logic of the evolution of economic

science and the structure of economic theory as well as its

models of scientific knowledge growth as the predecessors of

modern economic problems. That is, where is economic

analysis coming from, where is it now and where is it tending

to? There are several possible ways to categorise and organise

the evolution of economic science. But, here focus is laid only

on some crucial moments in the development of economic

ideas that are relevant for the theoretical and methodological

debates of present times. It is divided into four parts, namely,

ancient, medieval or middle ages, classical and modern times;

taking both historical and methodological perspectives as

shown in Figure 2.5

This is despite the fact that some prominent classical

scholars assert that relevant economic thought did not arise

until the enlightenment period, as early economics was based

on metaphysical principles which are incommensurate with

contemporary dominant economic theories such as

5 The periods are regarded as open and overlapping in the sense of covering intergenerational

Schools of Thought. After all, ideas do not simply die and get buried, they struggle and

compete with the emerging new thoughts that seek to cast and bind them. And this is simply natural in the struggle for survival.

5

neoclassical economics, (Lowry (2003), which cites especially

Meikle (1995) and Finley (1970)) on this score.

Economic thought in Antiquity

It is questionable if the ancients really had economic theories

of their own, if the reference is to “the history of the analytic

or scientific aspects of economic thought” ala Schumpeter

(1954). After all, no grand analytical systems existed until the

mid-eighteen century before the birth of classical political

economy in England. This notwithstanding, Ptak (2006) asserts

that the ancients of the likes of Hesiod, Democritus,

Xenophon, Plato and Aristotle provided significant insights

into economic theory through their praxeological deductions.

Hesiod is often labelled the first economist who dealt with the

problem of scarcity as far back as the 8th century BC and even

competition, which he saw as good conflict that tends to

reduce the problems of scarcity. Democritus, born in 460 BC, a

contemporary of Socrates, dealt with subjective value theory,

and time preference.

Xenophon, an Athenian aristocrat and army general,

was a contemporary of Plato too, who developed a utility

theory of value as reflected in his definition of property,

namely, “property is that which is useful for supplying a

livelihood, and useful things turned out to be all those things

that one knows how to use” as well as providing insight into

Figure 2: Development of Economic Theory

Arrowheads show the direction of progress

Ancient Economic Thought

before 8th

Century BC

(before 8th to 16th Century)

Medieval Economic

Thought

(1600 – 1800 AD)

Classical/Neoclassical

Economic Thought

(1723 – 1930)

Modern Economic

Thought

(1930 – )

6

the theory of profit. In fact, he is seen as the first to write

disquisition of economics, which translates from the Greek

"economic" to mean a science of housekeeping. With the

development of exchange and the forming of national markets

arises the necessity of a wider interpretation of the notion

"economics" and in 1615 a French scientist A. Monkretien

introduces in inversion of the term "political economy" that in

translation from Greek means "art of state management of

economy", which is founded on a principle of diligent

management, developed through experience, as a result of

generalisations of economic practice.

To Ptak (2006), Stoic thought (Circa 323 - 31 B.C. also

called the Hellenistic Period) presents a coherent notion of

natural law; while those of Lao Tzu, Chuang Tzu, Pao

Chingyen, and Ssu-ma Ch’ien, and Taoists in Ancient China,

provides insights into the spontaneous order of the market and

the effects of government intervention. The Late Scholastics,

including Jean de Pierre Olivi, Albornoz, Mercado, Saint

Bernadino, and Juan de Mariana, contributed to the economic

discussion of utility theory, international trade, private

property, the nature of government, and currency debasement.

The focus here however is on the writings of Plato

(427-347 BCE) and Aristotle (384-322 BCE).6 The

idiosyncrasies of the ancient social concepts, such as

“Household theory” and Plato’s division of labour and

distribution theory are under reference here. Indeed, many

economic concepts and thoughts are traceable to the ancients.

For example, Foley (1974) has suggested that Adam Smith

could not have gotten his original inspiration for the division

of labour principle (not from the usual sources cited but from

6 I am acutely aware that this list is non-exhaustive. There are many other ancient economic

thoughts; even Hammurabi's code of laws may be relevant here. Besides, there are different

legitimate ways of doing and organising history of economic thought. Further, it should be obvious that the focus is on formal discussion of economic issues.

7

the Greeks most especially Plato). He goes on to assert that

Plato provides an explicit model for Smith’s four-stage theory

of economic development as Plato has Socrates remarked in

The Republic that specialization occurs because we are not all

alike; there are many diversities of natures among us which are

adapted to different occupations.

The ideas of Aristotle have had a tremendous impact on

social and economic thought7. It was he who recognised the

vital importance of private property and denounced the

communism of the ruling elite advocated by Plato. According

to Aristotle, Plato’s collectivist utopia runs counter to

humanity’s multiplicity and the mutual advantage gained

through market exchange. Aristotle’s greatest contribution is in

his recognition and outline of the common characteristics of

private property that solidified his support. They include:

Private property is more productive and leads to

progress.

Conflict is inherent in communal property

management.

Private property is intrinsic to man’s nature. The

love of self, money, and property is tied to natural

love of exclusive ownership.

Private property has existed always and

everywhere.

7 This unit draws heavily from Ptak (2006), “The Prehistory of Modern Economic Thought:

The Aristotle in Austrian Theory” (see www.mises.org/journals/scholar/Ptak1.pdf; accessed 20/06/2009)

8

Only private property allows for opportunity for

moral action; to practice virtues of benevolence and

philanthropy.

According to Ptak (2006), Aristotle also had a

generally positive and accurate view of money despite his

unfortunate comment that the lending of money at interest was

“unnatural”. He correctly identified the growth of money as a

catalyst for increased production and exchange. He sees money

as a medium of exchange that is representative of general

demand and thus “holds all goods together.” Aristotle goes on

to explain that as everyone sells goods for money the problem

of the “double coincidence of wants” is eliminated. No longer

does each trader have to covet the other trader’s goods directly.

Aristotle appreciates the fact that money represents

human need or demand thus providing the motivation for

exchange and “which holds all things together.” Demand is

governed by the desirability of a good or use-value. Aristotle

approaches a cogent analysis of the impact of different levels

of supply on the value of a good. An echo of a marginal utility

theory of value and its resolution of the paradox of value can

also be discerned. Aristotle states that the quantity of a good

reaches a saturation point where the use-value plummets and

becomes insignificant. He points to the inverse effect that

when a good becomes scarcer, it will become subjectively

more valuable. In the Rhetoric, Aristotle states that “what is

rare is a greater good than what is plentiful. Thus gold is a

better thing than iron, though less useful”; although not a

complete refutation of the paradox of value, it was much closer

than many economists of the eighteenth century could get to.

Aristotle correctly identified the process by which the

value of final products is imputed to the factors or means of

production. In the Topics as well as in the Rhetoric, Aristotle

states that the “instruments of production” derive their value

9

from the “instruments of action”, the final products useful to

man. The greater subjective value of a good, the greater the

value of the means to arrive at that product; Aristotle thus

touched on the marginal component in this imputation stating

“judge by means of an addition, and see if the addition of A to

the same thing as B makes the whole more desirable than the

addition of B.” Aristotle correctly emphasises the value of the

loss rather than the addition of a good. “That is the greater

good whose contrary is the greater evil, and whose loss affects

us more.”

Aristotle’s analysis continued as he pointed out that a

saw is more valuable than a sickle in the carpentry profession,

yet it is not universally more valuable. The factors of

production play an important role in the whole process.

Aristotle also noticed that a good with many potential uses will

be more desirable than a good with only one use. Aristotle

provided clear insight into the economic theory of imputation

and marginal productivity tackled by economists more than

two thousand years later.

In general, the concerns of the ancients involved a

number of issues which they held in common, the answers to

which are the basis of the structure of well-functioning

societies today as much as in those early times. The issues

include how to make markets, taxation policies, and other

monetary instruments transparent and free from corruption;

when is profit permissible (and how much) based on the labour

of others, such as in the case of merchants, the charging of

interest and when does it become unacceptable usury; and

other practices that would otherwise destroy the well-being of

ordinary law-abiding people on which strong and unified

states were built. While their ideas were not always complete,

and in some cases involved long-lasting debates rather than

answers, much similarity can be found in their efforts. It is also

of note that early economic thinking, closely tied to

10

philosophical and/or religious tenets, generally took into

account the welfare of the common man, the worker, rather

than seeking ways to benefit a few elite individuals,

themselves or others (see “Early economic thought”, New

World Encyclopedia).

Humans undoubtedly behaved economically for many

centuries before they undertook to analyze their economic

behaviour and arrive at explanatory principles. At first, this

analysis was more implicit than explicit, more inarticulate than

articulate, and more philosophical, political and religious in

mode than economic. But in the face of ubiquitous and

inevitable scarcity, the study, in various forms and for various

proximate purposes, went on, (Spengler and Allen 1960:2). It

is clear that the earliest writings were not clearly separated

from other discussions, particularly those of justice and

morality.8 This reflects the reality of early societies — as Karl

Polanyi noted, early economies were "embedded economies,"

not separate and certainly not dominant institutions (Eggleston

2008).

Economic thought in the Medieval and Middle Ages

Even in the medieval period, Economics was still in the

public domain discussed by pamphleteers and all other sorts of

discussants without a corpus of professionals. Economics was

not considered a separate discipline until the nineteenth

century. Yet, economic thought has existed from the ancient

world right up to the present ages. Further, Aristotle’s

economic ideas were rediscovered in medieval scholastic

thought in the political philosophy of Thomas Hobbes (1588-

1679), whose ideas influenced Mercantilist economic writings;

with the philosophy of John Locke (1632-1704), the father of

8 Perhaps this and the fact that it was led for a while by moral philosophers may be why economics is often regarded as moral science

11

‘Classical Liberalism’, who provided the philosophical

foundations for the classical British economists including

Adam Smith, David Ricardo, and Rev. Thomas Malthus.

Indeed, the thoughts of the ancients resonated in the writings

of Early Christianity and the Scholastics.

Influence of the Early Church and the Scholastics

The Scholastics were a group of thirteenth and

fourteenth century theologians, who took on the role of

guiding society, notably the Dominican Thomas Aquinas that

set down the dogma of the Catholic Church building on Greek

thought as revived by twelfth and thirteen century Islamic

scholars such as the Persian philosopher Nasir al-Din al-Tusi

(1201-1274) who presented an early definition of economics

(what he called hekmat-e-madani, the science of city life) in

his Ethics (the study of universal laws governing the public

interest (welfare?)).

Perhaps the most well known Islamic scholar who

wrote about economics was Ibn Khaldun (732-808 AH/1332-

1404 C.E.) of Tunisia. Joseph Schumpeter (1954: 136)

mentions his sociology and others. Hosseini (2003) considers

him the father of modern economics. It is his insight into the

laws governing human behaviour and socio-economic

phenomena like division of labour, growth and decline of

population, and rise and fall of prices, which distinguished him

from many other social thinkers. The focus of his attention was

the various stages of growth and decline through which,

according to his insight, every society must pass. This theory

has been compared with John Hicks' theory of trade cycles

(Weiss 1995: 29-30).

Ibn Khaldun's idea about the benefits of the division of

labour relate to asabiyya, the greater the social cohesion, the

more complex the successful division may be, the greater the

economic growth. He noted that growth and development

12

positively stimulate both supply and demand, and that the

forces of supply and demand are what determine the prices of

goods (Weiss 1995: 31). He also noted macroeconomic forces

of population growth, human capital development, and

technological developments effects on development. In fact,

Ibn Khaldun thought that population growth was directly a

function of wealth (Weiss 1995:33).

A distinctive feature of Ibn Khaldun's approach to

economic problems is his keenness to take into consideration

the various geographical, ethnic, political, and sociological

forces involved in the situation. He did not confine himself to

the so-called economic factors alone. He would rather examine

whatever forces he found relevant to the issue under study. It is

in this context that one can appreciate his tendency to take a

people's religious beliefs and traditions into account while

discussing their economic behaviour and social institutions. He

was fully aware of the truth that production of wealth is not a

result of individual labour and enterprise only. It owes itself as

much to man's social and socio-political institutions, especially

the state and its administration.

Thus, Muslim economic thought greatly enriched the

Hellenic contribution to economic thought (oikonomia) and in

the areas of government of the kingdom by the caliph, of the

city, and the household organization. 9

Because of the status of the church, and because it was

the only source of any intellectual activity, medieval

economics grew out of the Church. Their views on economics

were gleaned from several sources — Aristotle, the bible,

Roman law, and canon law as revived by Muslim scholars

some of whom have been discussed above. Thus, medieval

economics was a product of the clergy — in particular a group

9 The succeeding discussions had drawn heavily from Ekelund, Jr. and Hebert (1997) and Reynolds (2000).

13

of learned writers now referred to as the Scholastics — a term

that generally means "professors" or "teachers."

Scholastic economics is not held in high regard. It is

commonly perceived as a tissue of misplaced fallacies about

market price, interest and property. Yet, they did hold some

ideas of value that may be traced to later developments, but for

the most part, they were concerned with justice and salvation.

Thus terms such as “just price,” came into wide usage, as well

as their idea that charging interest for the loan of money was

wrong.

Most of the references during this early period were to

the economic conditions of the time. There were certainly great

thinkers and great philosophers, but there was no common

thread — no systematic analysis of the issues in their writing.

Also, this was a period of a relatively simplistic economic

system. The feudal system characterised by (i) very little trade

outside the community; (ii) home production and consumption

(subsistence); (iii) money and credit were not widely used; and

(iv) there were no nation-states. So, it did not offer much for

intellectual discussion.

It was one in which the land was owned by the king,

and he donated it in large portions to his foremost noblemen.

There was no absolute ownership — merely a right to use the

land. In return, the nobleman had to pledge his services to the

king — military; personal; labour; and produce. Government

functions were vested in feudal lords, who reigned supreme

within their limited domains. However, no matter how slow,

every society evolves and so the world beyond feudalism was

emerging perhaps unnoticed.

In the economic sphere, it is possible to discern roughly

four themes the Scholastics were particularly concerned with,

namely, property, justice in economic exchange, money, and

usury. The growth of commerce forced the Scholastics to deal

with the impact of market exchanges. They identified the "just

14

price" as that which supported the continued reproduction of

the social order. The coexistence of private property with

Christian teachings was never comfortable. This

notwithstanding, in the fifth century, the early Church fathers

(the Patricians, such as Augustine) had struck down

"communistic" Christian movements and the Church itself

went on to accumulate enormous amounts of property (see

New World Encyclopedia).

Mercantilism

Mercantilism reigned (about 1500 – 1800 or 1776) and

was practised throughout Western Europe. The mercantilists

were the English “Pamphleteers” of the 16th, 17th, and 18th

centuries rather than a school of thought. They showed no

awareness of contributing to any definite stream of ideas. They

had neither principles nor common analytical tools. But still,

there were doctrinal threads that appeared again and again

focused on power.

Mercantilists were generally merchants supported by

some government officials, who gathered vast amounts of

trade data and used it considerably in their research and

writing. So, Mercantilism was the product from the assorted

pamphlets, studies and treatises of these groups of

practitioners. They had no systematic, comprehensive,

consistent treatise, no leader, common method, or theory; each

“mercantilist" sought advantage for a specific such as trade,

merchant, joint-stock company or social group.

"Protectionism" is often seen as a primary characteristic of

Mercantilism. The primary objective of Mercantilism was to

increase the power of the nation state. One of the important

aspects of national power or strength was wealth that was

equated with specie (precious metals especially gold and

silver). The states that followed a policy of mercantilism

15

tended to see trade, colonialism and conquest as the primary

ways of increasing wealth.

Most Mercantilists were practitioners, not theorists or

analysts — particularly the early ones. Later ones were less so.

Mercantilists were not so much concerned with justice and

salvation, as were the scholastics. They were real world

oriented may be because they are largely merchants and

government officials rather than theologians and philosophers.

Their writings were oriented toward policy applications that

would be favourable to themselves. But, the writings were not

thought out on any sound and logical theoretical or analytical

framework. Many of them took the form of special pleadings

and/or rent seeking undertones. Nevertheless, some economic

thinking or theorizing was implicit.

It was the economic theory and practice common in

Europe from the 16th to the 18th century. It promoted

governmental regulation of a nation's economy for the purpose

of augmenting state power at the expense of rival national

powers. It was the economic counterpart of political

absolutism. It was, in essence, economic absolutism. Its 17th

century publicists, most notably Thomas Mun (1571-1641) and

William Petty (1623 – 1687) in England; Jean Baptiste Colbert

(1619-1683) in France, and Antonio Serra in Italy, never used

the term Mercantilist to describe themselves. The name

Mercantilists was given to them by the Scottish moral

philosopher and economist named Adam Smith in his Wealth

of Nations (1776).

A Mercantilist Manifesto by Philipp Von Hornick was

developed in 1684. The points are

Extensive use of the soil to produce agricultural

products.

16

All commodities found in the country that cannot be

used in their natural state should be worked up within

the country.

Promote large population.

Gold and silver should not to be taken out of the

country.

Inhabitants should make every effort to get along on

their domestic products.

Foreign products to be obtained in exchange for

domestic goods, not gold and silver.

Goods should be imported in unfinished form, then

worked up within the country.

Seek opportunities to sell the country's superfluous

goods to foreigners in manufactured form.

Allow no imports of which there is a sufficient supply

of suitable quality at home.

Mercantilism’s Interlocking Principles included

Precious metals, such as gold and silver, were deemed

indispensable to a nation's wealth.

If a nation did not possess mines or have access to

them, precious metals should be obtained by trade.

It was believed that trade balances must be

“favourable,” meaning an excess of exports over

imports.

Colonial possessions should serve as markets for

exports and as suppliers of raw materials to the mother

country.

17

Manufacturing was forbidden in colonies, and all

commerce between colony and mother country was

held to be a monopoly of the mother country.

The anti-liberal mercantilist philosophy was the

dominant economic policy in the 16th to 18th centuries.

Between 1600 and 1800 most of the states of Western Europe

were heavily influenced by mercantilism policies. It gave rise

to unfair international trade and the parasitic nature of the

colonial powers. On the other hand, mercantilism can be seen

as the struggle of feudalism to remain relevant despite the

evolving new world order. Since, it is arguable that the most

important economic rationale for mercantilism in the sixteenth

century was the consolidation of the regional power centers of

the feudal era.

The Dictates of Mercantilism included:

Human wants were to be minimized, especially for

imported luxury goods since they drained off precious

foreign exchange.

Sumptuary laws (affecting food and drugs) were passed

to ensure that wants were held low.

Thrift, saving, and even parsimony were regarded as

virtues. Only by these means could capital be created.

In effect, mercantilism provided the favourable climate

for the early development of capitalism, with its

promises of profit.

In Mercantilists writings certain concepts and theories

did crop up, which they seemed not to appreciate, understand

or follow very well, some of which are highlighted below.

The Specie Flow Mechanism

18

The so-called specie flow mechanism was the “fly in

the ointment" for the Mercantilist.

Mercantilists did not believe or understand the specie

flow mechanism.

How does the specie flow mechanism upset the

Mercantilist applecart?

What is the Specie Flow Mechanism?

Inflow of gold — raises domestic prices.

Higher prices made imports attractive, domestic

goods unattractive, and therefore more difficult

to export.

Thus, selling dear and buying cheap tends to

increase imports and decrease exports, which in

turn, creates an unfavourable balance of trade

against a country.

To pay for this unfavourable balance of trade,

the country loses specie —not what you want to

do if you are a Mercantilist!

Some Mercantilists realized this, example,

Thomas Mun ((1571-1641)) realized it in 1630,

still he was a Mercantilist.

Views on the Specie-Flow Mechanism

Thomas Mun recognized the specie-flow mechanism

but did not appreciate its long term implications.

Other writers failed to understand the inconsistency

between specie-inflow and price stability.

19

Mercantilists sought to maintain a trade surplus as a

way to enrich the country.

Because of the specie-flow mechanism, a long term

surplus cannot exist.

In 1690, John Locke made perfectly clear that prices

vary in proportion to the quantity of money, but in

general, the Mercantilists did not put this together.

The Quantity Theory of Money

The quantity theory of money caused quite a dilemma

for the Mercantilists. The quantity theory of money is

explained in terms of the equation of exchange as expressed

below.

MV = PT

The left hand side of the equation of exchange is the

money supply and the right hand side the value of output

produced in the economy over a period of time, say a year.

There is some controversy over whether Mercantilists equated

money with wealth. Some writers such as Thomas Mun and

John Locke have maintained that wealth consists of more than

gold, i.e., land, houses, etc. But even they slipped away from

these ideas.

Also, the Mercantilists confused a nation with a family - the

old fallacy of composition. For a family to accumulate wealth,

it must spend less than its income. It must accumulate a

surplus over consumption and the Mercantilists thought this is

true of a nation as well.

Leading Features and tenets of Mercantilism

Maintaining a surplus in the balance of trade and

accumulating gold were the keys to prosperity.

20

Bullion and treasure were the essence of wealth.

Regulate foreign trade to produce inflow of specie.

Promote industry — import cheap raw materials.

Promote colonialism.

Place heavy tariffs on imported manufactured goods.

Encourage exports of manufactured goods.

Increase population and keep wages low.

Mercantilism in France

Luxury products like silks and linens tapestries,

furniture, wines, etc were of major importance.

Close regulation in the production of these goods was

essential to maintain high quality.

Under Jean Baptiste Colbert, Minister of Finance under

Louis XIV, national guilds were set up to regulate

major industries.

Only craftsmen who were guild members could

operate, and they were subject to regulation by the

national organization.

The royal power, supported by steady revenues from

the salt tax, was strong enough to enforce regulation.

Guilds remained powerful until the French revolution.

In France, mercantilism was referred to as Colbertism.

Mercantilism in England

In England, regulation of domestic industry was not

successful because government was always short of

21

money. (The salt tax did not work for Elizabeth as it

had for the Louis’.)

English Mercantilists were devoted primarily to

expansion of trade and encouragement of manufacture.

The result was that: medieval guilds disintegrated,

especially when cloth production developed in rural

areas.

Industrial processes were far freer of restrictions than

were those of France.

When Industrial Revolution began in late 18th century,

absence of guilds gave English industry a huge head

start over France.

Mercantilism in Germany

German mercantilism resembles in many ways that of

the French.

Called Cameralism, it was originally concerned with

problems of royal finance, taxation, and spending.

Very authoritarian political tendencies. Very little

development of democratic institutions in countries

where it was practiced.

Clear relationship between Cameralism of the 16th

century and the rejection of classical laissez-faire in the

19th century.

Pattern was set for a protectionist and institutional

evolution of economic theory and action.

We would see this trend if we went into the German

Historical School.

22

Von Hornick quoted earlier is one of two writers that

illustrate their thinking.

Historically, Mercantilism is associated with the rise of

the “Nation state.” Feudal institutions were weakened by the

increasing use of money and a greater reliance on exchange

within the economy and the Plague (The "Black Death" of

1346-61). Increasing use of money in the economy reduced the

role of barter and reciprocity, people wanted to sell or work for

money. Population of England fell by about 1.5 million (out of

a population of 5 to 3.5 million in 1346). The result was not

only more money per person (higher per capita income) but

also more animals, land and goods per person, and prices fell.

Labour shortage pushed wages and earnings up. Less people

with increased agricultural production (some problems with

harvests and animals dying), but on average, diets improved.

Labour became more mobile; masters on feudal estates had to

"hire" labour. This led to the rise of "free" labour. If you

couldn't hire workers, then you rent the land to others. Small

farms with limited labour shifted to pasture and sheep rather

than tilling the soil.

The Protestant Reformation weakened the role of the

church and consequently the civil role of the state was

expanded. There was a rise of Humanism (the concern for

well-being of humans in the short term). The decline of

feudalism was also influenced by changes in technology in

many dimensions such as the rise of mechanical power (water,

wind) used in textile and mining; mechanical clocks,

gunpowder, mechanisms and instruments, etc increased skills

of craftsmen who made machines. All these spurred the

“enclosure movement” and the commercialization of

agriculture; rise of markets and fairs; urbanization;

improvements in navigation, shipping, transport, moveable

type, (standardization, mass production and marketing of

23

books in a variety of languages)10

all helped the evolution out

of feudalism and from an agrarian into an industrial society.

Mercantilism has been long overtaken by other Schools of

Thought, but there are still modern day defenders of

Mercantilist theory. Further, Mercantilist policies are still in

vogue in particular in international trade and development

economics.

Classical Economic Thought

Modern economic thought emerged in the 17th and 18th

centuries as the western world began its transformation from

an agrarian to an industrial society. But, this was preceded by a

transformation from Mercantilism to Physiocracy in thought.

Historically, the Physiocrats represented a reaction against the

policies of Jean Baptiste Colbert [1619-1683], a Finance

Minister in the Court of Louis XIV. Colbert advocated strict

regulation of commerce, protective tariffs and is regarded as an

archetypical “Mercantilist.” There were a number of writers

who began to question the mercantilist policies of Colbert by

the early 1700s (examples are Pierre Boisguillebert [1646-

1714], Seigneur de Vauban [1633-1707] and later Richard

Cantillon [1680-1734]), The Physiocrats represented an

"alliance of persons, a community of ideas, and acknowledged

authority and a combination in purpose, which banded them

into a society apart", (Higgs, 2001). They held in common the

idea that all things are part of an interconnected system

that is rational and comprehensible to the human mind.

However it was François Quesnay [1694-1774] – a Surgeon

(anatomist) and medical doctor, who provided the basic

structure of the Physiocratic system in the late 1750's in his

Tableau Economique and other writings, many of which were

published anonymously or under pseudo names.

10 See Reynolds, 200.

24

The Physiocrats, a group of 18th century French

philosophers and economists opposed the Mercantilist policy

of promoting trade at the expense of agriculture because they

believed that agriculture was the sole source of wealth in an

economy. They developed the idea of the economy as a

circular flow of income and output. And as a reaction against

the Mercantilists' copious trade regulations, the Physiocrats

advocated a policy of laissez-faire, which called for minimal

government interference in the economy. For this reason they

are regarded as the early Classical economists.

The Early Classicists: The Physiocrats

The Physiocrats have been the subjects of so many and

such divergent appreciations by historians, philosophers,

economists, and students of political science, that hardly a

single general proposition of importance has been advanced

with regard to them by one writer which has not been

contradicted by another (Higgs, 2001). To de Tocqueville they

were doctrinaire advocates of absolute equality. To Rousseau

they were the supporters of an odious, if “legal”, despotism. To

Professor Cohn they were, in their main proposals,

“thoroughly socialistic.” To Louis Blanc they were tainted

with a bourgeois individualism. To Linguet their mystic jargon

was charlatanical nonsense, not to be understood even by

them. To Voltaire, physiocracy was so clear as to be made

easily comprehensible (and ridiculous) to the meanest

intelligence. To Taine, as to many others, they made

powerfully for revolution. To Carlyle, who speaks ironically of

“victorious analysis” and scornfully of “rose-pink

sentimentalism”, they seem to have been a mere literary ripple

on the surface of the great flood.

Rossi praised them for conceiving a vast synthesis of

social organisation; certain writers, like Mably, have blamed

them for a narrow materialism; while there are judges who

25

pronounce them markedly deistic. To Proudhon their system of

taxation was a rare Utopia; to others they lack an ideal of any

kind. They were to de Loménie a bundle of contradictions —

at once monarchical and democratic, half-socialist and highly

conservative. To Adam Smith their “system, with all its

imperfections, is perhaps the nearest approximation to the truth

that has yet been published upon the subject of political

economy, and is, upon that account, well worth the

consideration of every man who wishes to examine with

attention the principles of that very important science.”

To many compilers of little text-books, who know

better than Adam Smith, they are merely people who lived in

the dark ages before 1776, and held some absurd opinions

about land. To some they appear to have had a transitory

success followed by complete and lasting reaction. To Léon

Say their principles, after suffering reverses in the eighteenth

century, have dominated the nineteenth. Of many serious

writers, these anxious precedents, have appealed to their

authority in support of their own views; those, striving after

originality, have been eager to prove that the point which they

seek to emphasize was really missed by the Physiocrats; and

the great majority of authors have been content to follow the

well-worn phrases of one predecessor or another without direct

reference” to the writings of the old economists themselves.

Probably no man alive has read the whole published works of,

say, the Marquis of Mirabeau — to mention only a single

member of the school. And happily no one is obliged to do so.

When once we have mastered their doctrines we are dispensed

from following the prolix repetitions and tedious

amplifications which make up nine-tenths of their literary

activity. Yet, mastery is essential to a due acquaintance with

the history of economic theory. For the Physiocrats constitute

the first scientific school of political economy.

26

The term physiocracy means law or rule of nature.

Vaggi (1987) points out that the Greek word phýsis is nature

and kràtos is power. They believed that a natural system, free

from the intrusions of an improper man made law, would result

in a harmony and improvement of the human condition (ibid. p

869, The New Palgrave Dictionary of Economics, edited by

Eatwell, Milgate). This is the essence of laissez faire.

Physiocracy derives from a collection of essays by François

Quesnay (1694-1774) edited by Pierre Samuel du Pont de

Nemours and published in two volumes in 1767–1768 in

which the name Physiocratic figures prominently. Quesnay

was the uncrowned leader of what was perhaps the first school

of thought in economics. The school was highly influential on

economic policy matters in France in the period from 1756 to

the beginning of the 1770s during the reign of Louis XV. Even

more important, it had a decisive impact on the emerging new

scientific field of political economy. The school’s relatively

small number of followers and their strict adherence to the

teachings of Quesnay are presumably responsible for the

school also being known as a “sect”. The school’s major

members, apart from those already mentioned, were Abbé

Nicolas Baudeau, Victor Riqueti, Le Mercier de la Rivière, and

François Guillaume Le Trosne.11

11 See “On the natural law underpinnings of Physiocratic thought”, (see Rieter (1983)) fFrom

INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES, 2ND EDITION.

27

A key idea of Physiocracy was that agriculture (land or

extractive industry which included grasslands, pastures,

forests, mines and fishing [Vaggi, p. 871]) was the productive

sector of an economy. The society was divided into landlords,

farmers and artisans. Quesnay’s Tableau économique is a

model of the flows of commodities among the three sectors.

Land is seen as the source of net product that may be regarded

as a surplus. Trade and industry perform a function but were

seen as sterile in that they produce no net product. The

manufacturing sector is “sterile” because, while it uses part of

the net product of the agricultural sector and transforms it into

some other goods, it does not add to the (value of the) net

product (Meek 1962; Pressman 1994 cited in Higgs, 2001).

As a reaction against the extreme mercantilist policies

of Colbert, the Physiocrats advocated laissez faire policies.

They believed that if the positive order or rule of man could be

made consistent with the order of nature (not to be confused

with the state of nature), the well being of society could be

increased. Given the complex and high levels of taxation of

Louis XIV, one of the proposals was a single tax on land.

Core Beliefs12

The Physiocrats believed in the existence of a “natural

order,” or ordre naturel. They appealed to rational principles in

the tradition of a “Cartesian” perspective. The cosmos was

seen as a hierarchically and harmoniously arranged order.

There was a distrust of “data”, “positive” law and human

behaviour. The social order, “order positive” should be

consistent with the “natural order”. The Physiocrats “deduced”

a connected series of doctrines based on premises and

12 This has benefitted substantially from Reynolds, 2000.

28

endeavoured to include all social phenomena connected with

the production of wealth.

The natural order was not to be confused with state of

nature. It was founded on law and property rights. Physiocrats

denied that every one has a right to everything: “A Bird has a

right to an insect that it can catch.” They believed that liberty

and equality were incompatible. As a society grows wealthier,

inequality increases. Men in society are subject to natural laws

in the same way that the equilibrium of nature is maintained by

physical laws.

The Physiocrats saw the interrelation between physical

and social phenomena, but at that time physics and biology

were not highly developed in modern sense.

There was an emphasis on the individual and individual rights.

It was believed that the individuals know their interests and

will act on those interests. The principle idea embedded in

Physiocracy is that of “self interest” as the motivating force in

the economy. The rights of each individual limited the rights of

others. “Freedom of the foolish man must be restricted by the

state.”

Agriculture was the fundamental industry of the

country; liberty and security were its chief requisites.

Agriculture and commerce are regarded as the two resources of

wealth in France; but this distinction is, the Physiocrats

believed, a mere abstraction, for commerce and industry

(which is much more considerable than commerce) are but

branches of agriculture, — the primary and indispensable

source of the other two.

The Physiocrats believed in free trade and on their

recommendation in 1763 and 1764 the corn trade, both

domestically and abroad, was liberalised in France. But the

second half of the 1760s saw substantial increases in the price

of corn, which the public took to have been caused by the

liberalisation policy. However, there is reason to think that the

29

price increase was the result not so much of grain exports as a

series of bad harvests (see International Encyclopedia of the

Social Sciences, 2nd Edition). The experiment was terminated

in 1770, and since its failure was blamed on the physiocrats, it

comes as no surprise that their influence declined as quickly as

it had risen (Weulersse 1910; Hecht 1958). In other countries

the ideas of Quesnay and his followers (the Physiocrats)

remained important, at least for a while, including especially

Germany and Russia.

Classical School of Scientific Political Economy13

Strictly and generally speaking, economic thought as it

has evolved so far is as political economy provided the ideas

are weighed sympathetically in the context of the times in

which they developed. So, perhaps the difference between the

past and the time of the Classical School is the development of

scientific political economy. The prefix "classical" is used to

denote the adoption in the late eighteenth century of an

approach which was inspired by the enlightenment and the

methodology of the physical sciences, and which abandoned

previous tendencies to examine the subject in the context of

ethics, religion and politics, (“History of economic thought”,

Citizendium (2009)). It was the tendency to examine the

subject in the context of ethics, religion and politics that made

economics look like a moral science. Classical economics is

widely regarded as the first modern school of economic

thought. The Classical School of economics was developed

about 1750 led by Adam Smith and lasted as the mainstream of

economic thought until the late 1800’s. Strongly opposed to

13 Even Adam Smith regarded the political economy of the physiocrats as scientific (see Higgs, 2001, p. 6). This, however, is disputed by Stigler (1982), who believes that the scientific age of

economics started with Adam Smith and his Wealth of Nations. There are, of course, many

who don’t even think that there are sciences outside the natural sciences such as Luskin (2008).

30

Mercantilist doctrines, it was influenced by Physiocracy, the

British enlightenment, classical liberalism, capitalism and the

early stages of the industrial revolution, the work of David

Hume and the methodology of the physical sciences.

Nineteenth- and early twentieth-century economists

applied deductive reasoning to axioms considered to be self-

evident truths, and to simplifying assumptions which were

thought to capture the essential features of economic activity.

That methodology yielded concepts such as elasticity and

utility, tools such as marginal analysis, and theorems such as

the law of comparative advantage. An extension of the

relationships governing transactions between consumers and

producers was considered to provide all that was necessary to

understand the behaviour of the national economy.

Interestingly enough, the creator of the term was Karl Marx,

and it was further perpetuated by John Maynard Keynes in his

The General Theory of Employment, Interest and Money published in 1936.

On the other hand, historians categorise economic

thought into “periods” and “schools”, and tend to attribute

each innovation to one individual or a group. That is helpful

for the purpose of exposition, although the reality has been a

story of interwoven intellectual threads, crossing some

categories and often persisting through all of them

(mercantilism is a good example); and in which advances

attributed to particular individuals have often been prompted

by the work of others. For example, the quantity theory of

money, that achieved prominence in the twentieth century and

is associated with the name of Milton Friedman, was first

formulated at least three centuries earlier. Many of those

threads - such as the concept of value and the nature of

economic growth - that have permeated the categories referred

to as "Classical economics" and "Neoclassical economics", had

31

an earlier origin in Pre-classical economics (see Citizendium,

2009).

Admittedly, Political Economy became an integrated

body of knowledge and a separate discipline in 1776 with

Adam Smith's monumental work, The Wealth of Nations. For

this reason Adam Smith is often regarded as the father of

modern economics though some economists would wish to

give the title of founder of economics to earlier writers such as

Cantillon (Stigler, ibid.). A major advance in the development

of economics occurred with the publication in 1776 of Adam

Smith's An Inquiry into the Nature and Causes of the Wealth

of Nations. It was a comprehensive treatment of the subject,

using deductive logic in a similar way to its use in the physical

sciences. Its main purpose was to recommend changes in

economic policy in the interests of economic growth.

Adam Smith argued that the division of labour was the

main cause of economic growth, and that government

intervention in commerce was its main impediment. He

advocated government spending upon what are now termed

public goods such as defense, law enforcement and

infrastructure, and upon the education of the children of people

who could not afford it – and, by implication, upon nothing

else. He identified what he considered to be the economic

drawbacks of all forms of taxation (except the taxation of land

values) and of the deficit financing of public expenditure. He

examined the relationship between price and value and

concluded that the “natural price” of a product was the same as

its cost of production, and that divergences from it would

eventually be bargained away. Adam Smith is thought to have

got many of his ideas from his friend David Hume and from

conversations with the French Surgeon and economist,

Francois Quesnay (and his fellow "Physiocrats"), but he had a

far greater influence upon economic thought. Political

economy reached maturity in the works of Jean-Baptiste Say,

32

the Rev. Thomas Malthus, David Ricardo, Jeremy Bentham

and John Stuart Mill. Sometimes the rank of the classical

economists is expanded to include William Petty14

, Johann

Heinrich von Thünen, A. C. Pigou, Alfred Marshall and even

Karl Marx. In fact, Keen (2003) even asserts that a dialectical

interpretation of Marx provides a foundation for a viable rival

to neoclassical economics.

The theories of the classical school were mainly

concerned with the dynamics of economic growth. Reacting

against mercantilism, classical economics took many of its

cues from its predecessors while clearing contradictions and

correcting recognised fallacies. Central to the theory were

economic freedom, competition, and laissez-faire (limited)

government. The idea that economic growth could best be

promoted by free trade, unassisted by government, was in

conflict with mercantilism. According to Marshall classical

economics was cogent and logically correct. While its

assumptions encompassed many broad and challengeable

generalisations, its sweeping logic was elegant. Few episodes

in the history of economic thought match the achievements of

the classical economists in discovering and formulating the

operations of an entire economic system. In addition, they

established the method upon which modern economic

reasoning is based. Although the assumptions of classical

economics were in fact simplistic, the goal of the classical

economists was nothing less than global analysis of entire

economies. One might legitimately wonder whether such large

ends would or could be sought by contemporary economists.

"Progress" and the quest for technical accuracy have probably

robbed us of the wit, but the classical theoretical structure

remains as an inspiration for such an attempt.

14 Reynolds (2000) thinks that William Petty is the bridge between the Physiocrats and the Classical School.

33

The Wealth of Nations identified land, labour, and

capital as the three factors of production and the major

contributors to a nation's wealth. In Smith's view, the ideal

economy is a self-regulating market system that automatically

satisfies the economic needs of the populace. He described the

market mechanism as an "invisible hand" that leads all

individuals, in pursuit of their own self-interests, to produce

the greatest benefit for society as a whole, sometimes called

the “harmony theory”. Smith incorporated some of the

Physiocrats' ideas, including laissez-faire, into his own

economic theories, but rejected the idea that only agriculture

was productive. While Adam Smith emphasized the

production of income, David Ricardo focused on the

distribution of income among landowners, workers, and

capitalists. Ricardo saw a conflict between landowners on the

one hand and labour and capital on the other. He posited that

the growth of population and capital, pressing against a fixed

supply of land, pushes up rents and holds down wages and

profits.

Thomas Robert Malthus used the idea of diminishing

returns to explain low living standards. Population, he argued,

tended to increase geometrically, outstripping the production

of food, which increased by arithmetic progression. The force

of a rapidly growing population against a limited amount of

land meant diminishing returns to labour. The result, he

claimed, was chronically low wages, which prevented the

standard of living for most of the population from rising above

the subsistence level. Malthus also questioned the automatic

tendency of a market economy to produce full employment.

He blamed unemployment upon the economy's tendency to

limit its spending by saving too much, a theme that lay

forgotten until John Maynard Keynes revived it in the 1930s.

Malthus was in a search for general theory of value and valid

methods in economic analysis.

34

Coming at the end of the Classical tradition, John

Stuart Mill parted company with the earlier classical

economists on the inevitability of the distribution of income

produced by the market system. Mill pointed to a distinct

difference between the market's two roles, namely, allocation

of resources and distribution of income. The market might be

efficient in allocating resources but not in distributing income,

he wrote, making it necessary for society to intervene. In the

late 18th century, Jeremy Bentham developed the theory of

‘Utilitarianism,’ which was introduced into Economics through

the writings of John Stuart Mill, which shaped economic

thinking. It is still very much an integral part of modern

economic theory at the introductory levels, at least.

Heterodox Economics

We shall treat all the other schools of thought as

coming under heterodox economics to refer to all that are

considered outside of classical orthodoxy. Thus, heterodox

economics is an umbrella term used to cover various separate

unorthodox approaches, schools, and/or traditions. These

include Marxian, neo-classical, institutional, Keynesian,

monetarism, post-Keynesian, feminist, Austrian, ecological,

environmental and social economics among others.15

The

views of these schools may be contrasted with the framework

used by the majority of economists, commonly referred to by

its supporters as mainstream16

and by critics as orthodox. This

framework consists of the neoclassical synthesis, which

combines a neoclassical approach to microeconomics and

15 It is beyond the scope of the lecture to traverse all the known schools of thought, traditions,

approaches and methodologies in economics given the very important space considerations.

As it is said earlier, the focus is on some crucial moments in the development of economic ideas. 16 To many, mainstream economics may be synonymous with neoclassical orthodoxy and

should not be under heterodox. But, it is here so accommodated as a refinement on Classical economics.

35

Keynesian approach to macroeconomics, with varying degrees

of emphasis.

Marxian Political Economy

Can Karl Heinrich Marx (1818−1883), a revolutionary,

social thinker and economist be considered as a representative

of the classical school? Marxian theory is the political

economy of growing social conflict which challenged and

critiqued the foundations of Classical economics, what he

called Capitalism. Marx adopted the Ricardian labour theory of

value and worked out all of its logical implications focusing on

laws of the dynamics of capitalism. He combined it with the

theory of surplus value to examine society and argued that the

wealth of capitalists was based on paying labour less than their

true labour value (underpaid labour), which is the sole source

of profits (surplus). This difference between the true labour

value and the wages paid led to the accumulation of money

capital. Consequently, Marx held that revenues of production

belonged to labour, and the surplus value or profits, properly

belonged to workers. For this reason, and due to an army of

unemployed workers which keeps wages low, capitalists

exploit workers. However, as capital goods accumulate, the

rate of profit will fall, and industry will become more

concentrated in ownership. Eventually, the proletariat would

revolt and own the means of production, sharing the product

first according to contribution (Socialism) and ultimately

according to need (Communism). Marx believed that

capitalism suffered a set of internal contradictions in its very

philosophy which would eventually cause it to collapse.

In sum, Marx argued that Capitalism was inherently

unstable because:

Workers were abused and disenfranchised. As

capitalism developed, Marx predicted, workers would

36

become increasingly alienated and seek to overthrow

the capitalist class.

Capitalists could make bad decisions about what to

produce.

Growth was not guaranteed but could become volatile

leading to periods of economic slump. Marxists

certainly point to the Great Depression as a vindication

of how capitalism can fail.

Modern Marxist economists follow Marx's general line

of thought, with various modifications. Despite the failure of

socialist systems and the theoretical criticism of Marxist

thought, Marxists continue to believe that the market process

(Capitalism) is inherently flawed and needs much fixing.

Marginalist Revolution and Neoclassical Economics

A number of heretics quickly arose from the church of

classical economics (Burtini, 2009). They range from the

Marxians to the Keynesians and everything in-between, a

beautifully impressive body of competitive works have

defined, redefined and re-redefined what economics is, and all

of its basic tenets. Marx’s criticism of capitalism; Malthusian

rejections (”gluts”, the foundation of Keynesian theory) and

the French rejections of classical economics - subjects that are

too vast to address in this lecture became the foundation of

neoclassical economics at about 1870. The newly founded

London School of Economics became a competitive, driving

force against the U.S. based Chicago and Cambridge schools

of economic thought, each providing its own new contribution

to economics and dividing the field in to a number of diverse

theories.

The economists of the English historical school were in

general agreement on several ideas. They pursued an inductive

37

approach to economics rather than the deductive approach

taken by classical and neo-classical theorists. They recognized

the need for careful statistical research. They rejected the

hypothesis of "the profit maximizing individual" or the

"calculus of pleasure and pain" of the homo economicus as the

only basis for economic analysis and policy. They believed

that it was more reasonable to base analysis on the collective

whole of altruistic individuals. They also rejected the view that

economic policy prescriptions, however derived, would apply

universally, without regard to context – place or time, as

followers of the Ricardian and Marshallian schools did.

Marginalist Revolution (1871-1874)

Marginalism refers to the use of marginal concepts

within economics – (marginal concepts are associated with a

specific change in the quantity used of a good or service, as

opposed to some notion of the over-all significance of that

class of good or service, or of some total quantity thereof,

(Wikipedia)). In practice, marginalism actually refers to

making very small changes at a time in quantities or variables

under reference and study to see the effects of such small

changes. It connotes analysis of incremental changes, where

the increments could be infinitesimally small. The dating of

this "revolution" is commonly ascribed to 1871-74, when the

concept of diminishing marginal utility was introduced by

William Stanley Jevons, Carl Menger and Léon Walras, to pin

down the character of demand -- thus the term "Marginalist".

The fathers of the marginalist revolution are William

Stanley Jevons (1871), The Theory of Political Economy

(England), Carl Menger (1871), Principles of Economics

(Grundsätze), and Leon Walras (1874), Elements of Pure

Economics (Switzerland). But their precursors include Thomas

Malthus (1814), George von Buquoy (1815), Perronet

Thompson (1824), Augustin Cournot (1838) and Charles Ellet

38

(1839), (see Cunningham, 2006). Cunningham regards them as

marginalists before Alfred Marshall. They sought to apply

calculus, physics and engineering methodologies to economic

analysis. They disproved the labor theory of value and

believed that the marginal principle provides a unifying

framework and placed less emphasis on growth, while

focusing on optimization, equilibrium and mathematical

methods with concentration on economic science. They

recognized the need for careful statistical research for purposes

of verification of their hypotheses.

The central concept of marginalism proper is that of

marginal utility, but marginalists following the lead of Alfred

Marshall (1842–1924) were further heavily dependent upon

the concept of marginal physical productivity in their

explanation of cost; but the neoclassical tradition that emerged

from British marginalism generally abandoned the concept of

marginal utility and gave marginal rates of substitution a more

fundamental role in consumer theory and theory of the firm.

The Method of the Marginalists included marginal

principle with emphasis on microeconomics; abstract,

deductive method; assumption of perfect competition; less

emphasis on supply, more on demand in price setting;

subjective valuation; equilibrium approach; equal footing for

all factors of production; rational agents; minimal government

intervention. For the theory of the firm, they used the

applications of calculus, physics (thermodynamics, formalism

of energy physics and the maximum principle) and engineering

principles and methodologies to economic analysis. Their

theory of monopoly was built on the hypothesis that each

person seeks the greatest value from his/her property or labor

until it reaches the competitive case. The labour theory of

value is disproved believing that the marginal principle

provides a unifying framework. They put less emphasis on

growth and focused on optimization (interpreted to be the best

39

in any given situation), equilibrium and mathematical methods

as applicable to economic science.

The marginalists were highly formal and mathematical

in their analysis. For example, in 1814, Malthus mentioned

that differential calculus might be useful in economics; in

1815, George von Buquoy applied the calculus to an

agricultural problem; in 1824, Perronet Thompson became the

first writer among English economists to use calculus in

economic analysis; Johann Heinrich von Thünen (1783 - 1850)

was a prominent nineteenth century economist and (north

German) landowner, who in the first volume of his treatise,

The Isolated State (1826), developed the first serious

treatment of spatial economics, connecting it with the theory of

rent. Its importance lies less in the pattern of land use predicted

than in its analytical approach. Von Thünen also developed the

basics of the theory of marginal productivity in a

mathematically rigorous way, summarizing it in a formula.

Antoine Augustin Cournot (1801-77) in 1838,

published Researches into the Mathematical Principles of the

Theory of Wealth in which he applied mathematics to profit

maximization in competition, monopoly, and duopoly resulting

in the equilibrium condition, MR (marginal revenue) = MC

(marginal cost). His theory of duopoly is the precursor of non-

cooperative game theory, i.e. duopolists act in anticipation of

the opponent’s action working with reaction curves that

produced equilibrium that lies between monopoly and

competition solutions. His is regarded as the first systematic

development of the application of the marginal principle to the

theory of the firm using mathematical economics of the “pure”

type approach that was consistent with French ‘Rationalism’ –

a theory that reason is in itself a source of knowledge superior

to and independent of sense perceptions; and supply and

demand. They worked with the hypothesis that each person

40

seeks the greatest value for his/her property or labour. In 1839,

Charles Ellet used the calculus to determine an optimal tariff.

Philip H. Wicksteed (1844-1927) developed a theory of

marginal productivity and distribution. He alone asked whether

and under what conditions the total product would be

exhausted by the marginal products and provided the answer in

Euler’s Theorem, namely, i

xiMPxTP , where TP is total

product, MPx = marginal product of input x and xi quantity of

input i. He argued that exhaustion of the marginal product

requires a linear homogeneous production function. Wicksteed

also argued that this requires constant returns to scale (i.e. if

you double the inputs (materials) output also doubles) in his

1894, Essay on the coordination of the Laws of Distribution.

Francis Ysidro Edgeworth (1845-1926) wrote many articles

and a monograph entitled Mathematical Psychics in (1881).

He sought to apply mathematics to the social (moral) sciences

and expanded Jevons notions on the utility function. He

introduced indifference curves and the Edgeworth box that are

prominent in the ordinal utility theory of consumer behaviour

and international trade theory. Alfred Marshall published his

Principles of Economics in 1890 (1st edition), 1920 (8th

edition). He was a marginalist who not surprisingly used

mathematical framework.17

Yet, he wrote for the intelligent

layman putting graphs in footnotes and mathematics in

appendices and used biological rather than

mechanical/mathematical, analogies for examples. Marshall is

regarded as the bridge between the marginalists and the

neoclassicals.

17 Alfred Marshall was a mathematician

41

Neoclassical Economics (1875 – 1890)18

The term was originally coined by Thorstein Veblen in

1900, in his “Preconceptions of Economic Science”, to

distinguish marginalists in the tradition of Alfred Marshall

from those in the Austrian School. Given the prefix “Neo” in

the expression “Neo-Classical Economics”, it is not clear if it

is suggestive that today’s prevailing economics is a

continuation or a new edition of Classical Economics.

Neoclassical economics is a term variously used for

approaches to economics focusing on the determination of

prices, outputs, and income distributions in markets through

supply and demand, often as mediated through a hypothesised

maximization of income-constrained utility by individuals and

of cost-constrained profits of firms employing available

information, technology and factors of production, in

accordance with rational choice theory.

There seems to be some confusion over the origins of

neoclassical thought. It might be due to the fact that it

developed at the time of the Marxian criticism of Capitalism

with rising socialist ideas in Europe. There were of course, the

French rejections of classical thought and the development of

the marginalist revolution. For these reasons it is believed in

some quarters that the response to Marxian and other rejections

of classical economics and the methodology of the

marginalists became the foundation of neoclassical economics

in about 1870. Thus, the term "neoclassical" is commonly

applied to all of the continuing developments in economic

thinking that followed the replacement of value-based

concepts by a systematic consideration of the behaviour of

markets that are governed by the interaction of supply and

demand (Marshallian economics). In that sense, the term

18 For some this the mainstream economics orthodoxy, (see Peter Monaghan, http://chronicle.com/free/v49/i20/20a01201.htm)

42

denotes a period rather than a consistent approach, although it

is a period that overlaps the competing approaches of

Keynesianism and monetarism.19

It is nevertheless a period in

which most economists have deduced their findings from the

same hypothetical postulates - including the assumption of

competitive markets in which consumers maximise utility and

producers maximise profits subject to constraints, and which

interact so as to constitute a stable, coherent and predictable

system that is now known as the "neoclassical model". Within

that framework of postulates, neoclassical economists have

explored a variety of aspects of economic activity in a variety

of different ways.

The neoclassical period is also marked by an expansion

in the number of people applying their minds to the problems

of economics, as a result of which there frequently have been

similar contributions from a number of different thinkers.

Consequently, there has been a confusion regarding the origins

of neoclassical economics. Some writers date it from 1871 to

imply that it was started by the marginalists and hence the

conclusion that it is a natural outgrowth of the marginalist

revolution or even of natural outgrowth of those themes

already present in classical economics (e.g., in the works of

Adam Smith and David Ricardo) and French economic

thought (e.g., in the enterprises of Cournot), (see Blaug (1978:

322). Others end it in 1890, when it is supposed to have begun

with Marshall’s publication of the Principles of Economics.

The “Marginalist Revolution” concerns the discovery

of marginal utility theory, which occurred in the 1870’s. It

embodies the birth of neoclassical economics. However, there

are four main motivations for an examination of the origins of

neoclassical theory. The first is romantic, concerned with

tracing the intellectual background of this innovation. The

19 Though, monetarism in a sense is an innovative revival of classical economics.

43

second pertains to an interest in the methods of celebrated

discoverers, to provide a model for currently accepted methods

of research. The third motivation is of practical importance.

For instance, the theoretical suggestions around the time of

marginalist revolution may serve to prompt novel

contemporary lines of inquiry that may have possibly been

clouded by modern theory. The fourth arises from the curious

circumstances surrounding the marginalist revolution. For

example, William Stanley Jevons once asserted that marginal

utility theory had been independently discovered three or four

times before.

Equilibrium and the Price Mechanism

The concept of market equilibrium is central to the

neoclassical model. Leon Walras thought of it as the

achievement of an imaginary auctioneer who adjusts a notional

opening price in response to a succession of bids by buyers and

sellers, and permits transactions to take place only when a

price is reached at which buyers are willing to buy all that is

offered for sale. That is, the process of price determination by

supply and demand which marks the abandonment of the

concept of value-determined price, and which is examined in

detail in Marshallian Economics and in Milton Friedman's

Price Theory. Walras, and subsequently the Italian economist

Vilfredo Pareto, later developed the concept of a general

equilibrium in which supply is equal to demand in every

market simultaneously in a closed economy. The normal

assumption of neoclassical economics is that of a stable

equilibrium to which the economy will automatically return

after a disturbance. In particular, unemployment cannot persist

because any excess in the supply of labour, relative to its

demand, is corrected by a reduction in wages.

44

Welfare and Efficiency

The most politically influential of the contributions of

the neoclassical economists was probably their development of

the concept of welfare. In accordance with the precepts of

representative government, they assumed the criterion for the

success of an economic system to be the welfare of the

individual, and they introduced the concept of economic

efficiency as a measure of that success. Vilfredo Pareto took

the lead in defining efficiency taking his cue from the concept

of the efficient machine, as a state in which no-one could be

made better off without making someone else worse off. Three

types of efficiency were identified as productive efficiency (the

production of good at minimum cost), allocative efficiency

(the provision of the mix of goods that consumers want) and

distributive efficiency (the distribution of the goods and

services in such a way as to maximise individual and social

welfare). That work laid the foundations for the subsequent

development of the theory of welfare economics by Sir John

Hicks and others. (The subject of economic welfare is

discussed extensively in Arthur Cecil Pigou's Economics of

Welfare, and the theorems of welfare economics are

summarised in William Baumol's Economic Theory and

Operations Analysis.

Competition

The theorems of welfare economics establish a

presumption that allocative efficiency will be achieved - that is

to say resources will be optimally allocated as between the

production of alternative products - under the hypothetical

conditions of perfect competition. (Those conditions include

the requirement that for each product there is no supplier large

enough to influence prices, that all producers supply identical

products, and that all consumers are well informed and behave

45

rationally.) Despite the unreasonableness of these

requirements, most economists advocate a presumption that

restrictions upon competition will result in a reduction in

efficiency - a presumption that is open to rebuttal, however, if

economies of scale yield gains in productive efficiency that

outweigh the loss of allocative efficiency. Those theoretical

developments were the foundation for antitrust and other forms

of competition policy, the economics and politics of which

have been developed by George Stigler and other members of

the Chicago School of Economics.

The theory of the firm

The tools of welfare economics were also used to

develop the theory of the firm by Nicholas Kaldor of the

London School of Economics in his Equilibrium of the Firm

and Ronald Coase in his The Nature of the Firm. (These

theoretical developments have been summarised in William

Baumol's Economic Theory and Operations Analysis. An

empirical study of the way firms actually behave is provided

by Cyert and March's Behavioral Theory of the Firm)

Economic growth

There has been successive attempts to create models of

economic growth that identify the contributions of such factors

as investment, productivity, innovation and institutional

environment that explain the differences in growth experienced

by different nations and regions of the world. In the simple

model proposed by Malthus in 1850, growth could not exceed

population growth, but it was not long before it became

evident that it was doing so. The Harrod-Domar model and its

successors assume that there would be sufficient economic

growth to enable some to go into growth-enhancing

investments. In a later development, the 1956 Solow model

introduced the influence of the substitution of capital for

46

labour resulting from investment in improved capital

equipment. Solow also pioneered the technique of growth

accounting, which he used to estimate relative contributions to

historical growth in the United States in which he identified an

unexplained residual, which he termed total factor

productivity, the growth of which he attributed to

technological change. Technological change was "exogenous"

to the Solow model, in that it was not the consequence of

factors that were represented in the model. As a result of

subsequent research, notably that of Paul Romer and Robert

Lucas, some of the factors believed to influence technological

change, such as expenditure on research and development

(R&D) and training, have since been embodied in the growth

models, which are termed endogenous growth models. The

most recent work on the subject has sought to identify the

contributions to economic growth of institutional factors such

as quality of governance, trust, and ethnic diversity; and to

explore its links with geographical factors and globalization.

Besides Menger, two other economists, Stanley Jevons

in Great Britain and Leon Walras in France pioneered marginal

utility theory and thus sparked a revolution in economic

thought that converted most economists from classical to

neoclassical analysis. In neoclassical thought, the value of

goods derives not from labor but from their marginal utility.

The classical differentiation of land and capital became

blurred, as neoclassical theory became increasingly described

in mathematical terms. Land became treated as part of capital.

Walras pioneered the theory of general equilibrium, with a

model of an entire economy where all production is

interrelated in an equilibrium setting all prices and quantities.

Alfred Marshall in Great Britain developed the theory of

supply and demand, including the geometrical conventions of

the curves. In Sweden, Knut Wicksell, influenced also by

Austrians, further developed theories of capital, interest, and

47

public finance. Favorable to taxing land, Wicksell originated

the concept of the natural rate of interest in a free market.

The institutional school

While most economic theory is based on abstract

supply and demand, factors, and expenditure, the institutional

school points out that organisations also influence economic

activity. The American economist Thorstein Veblen was a key

theorist in this approach. Government, large corporations,

banks, labor unions, and social organizations certainly affect

the outcomes in economies, and institutional economics is

important in the understanding of economic history and current

economic life. The theory of institutions is also part of basic

economic theory. Both the Austrian and neoclassical schools

have included institutional concepts in their theories, including

the role of central banks in Austrian monetary theory and the

role of land tenure in neoclassical theory.

The Interventionist School and Keynesianism

When modern neoclassical economics failed to identify

causes of the Great Depression, John Maynard Keynes stepped

up with his publication, The General Theory of Employment,

Interest and Money, laying clear foundations for what modern

economists refer to as “macroeconomics” coined in 1951 by

Regnar Frisch. Keynes supported a number of beliefs, at the

time exotic beliefs about what defined economics and how to

properly analyze the Great Depression (the driving force

behind Keynesian popularity) - much of Keynesian thought

has been eliminated in the modern body of economic works,

but, Keynesian philosophy still drives much of both

neoclassical economics and political behavior internationally.

During the great world-wide depression of the 1930s,

many neo-classical economists came to doubt the full-

employment claims of neo-classical macroeconomic theory,

48

although Austrians and neoclassical economists recognized

that the economies of the early 20th century had many

interventions which had led to the depression. John Maynard

Keynes (1936), tried to overturn many neo-classical concepts,

although microeconomic neoclassical theory was not

questioned. It seemed like neoclassical economics was not

prepared for a phenomenon such the Great Depression or

simply relied on “classical macroeconomics”20

as summarised

in Say’s Law, namely, supply creates its own demand; rather

than the correct Keynes Law – effective demand creates its

own supply.

Keynes argued that wages would not automatically or

swiftly adjust to a lower supply and demand juncture, but can

remain stuck at a high level, reducing the demand for labor and

creating unemployment. Also, Keynes disagreed with the

classical and neoclassical concept that investment increases

with lower interest rates. To Keynesians, markets do not

necessarily work well, and they are not always self-correcting

when unemployment rises and output declines. Government

intervention is needed to boost demand. Whereas classical

theory states that the supply side determines output, since

factors are paid the full amount of the product, and since prices

adjust to equilibrate supply and demand, Keynesian

interventionists’ claim that prices and wages don't in fact

adjust and that in a money economy, the total demand for

products can be insufficient, since people don't necessarily

spend enough.

Keynesian policy thus emphasizes increasing demand

during a depression by increasing the money supply, by

increasing government spending, raising the money supply,

and reducing taxes to increase private spending. During a

boom, the government can reverse these policies to reduce

20 Not so conventional term.

49

inflation. Interventionists have restored some mercantilist

policies, some arguing for protectionist measures.

Critics of such interventionist policies point out that the

interventions, first of all, do not necessarily work in the long

run. Inflating the money supply eventually raises prices and

stops raising output, aside from distorting prices and

production. Also, these policies attempt to treat the effects of

economic problems without analyzing the root causes, which

turn out to be interventions rather than the market process

itself.

In response to these critiques, a New-Keynesian school

has developed, with more sophisticated theories, how markets

fail and how intervention can correct them, so the debate

continues.

The New-Classical Macroeconomic School

In reaction to the interventionists, especially in money

and banking, the monetarist school restored the classical theory

of money that emphasizes the role of the quantity of money.

High money expansion in the long run leads to inflation rather

than increasing output. A key monetarist has been the late

Milton Friedman in the United States. Monetarists point out

that government does not have the information and knowledge

to respond to every twist and turn in the economy, so instead

of discretionary policy, it is better to have some rule that will

be followed by central banks. Monetarism is not a complete

macroeconomic theory, but is a school within

macroeconomics, especially for monetary economics.

More comprehensively, some economists have argued

against intervention as the "new classical" school. A key

concept in this school is that of "rational expectations," which

states that people create judgements about the future behaviour

of economic variables such as inflation using past information

and some model or theory of the economy, by which they will

50

avoid systematic mistakes. The New-Keynesian school has

accepted rational expectations, so it is not an exclusively new-

classical principle, but it is used to rebut some interventionist

policies, since the new-classicalists state that people will

recognize and respond to expected policy interventions.

The famous Milton Friedman in his Monetary History

of the United States 1867-1960 raised a further rejection of

standard neoclassical economics, with regard to monetary

policy and founded the creation of a new school - the

Monetarist school, concerned mostly with the theories of

money supply, national income, and central banking.

Monetarists advocate a central bank with policies which aim to

keep the supply of and demand for money at equilibrium - that

is, focus on price stability rather than using floating interest

rates to inject and withdraw money at more arbitrary cycles.

This is defended by the claim that inflation is directly

correlated to the money supply, and that a creation of more

money without an equal creation of productivity would reduce

the (unmet) demand for money, and thus drive down its value.

The post-Keynesian school

A new macroeconomic school of thought based on

Keynesian thought, expanded by the work of the Polish

economist Michael Kalecki, has been called "post-Keynesian."

They follow Keynesians in believing that markets don't always

clear and that individuals don't always perceive the correct

market signals. They also have adopted some institutionalists’

thoughts and the Marxist emphasis on the different economic

classes, the workers and capitalists. Post-Keynesian thought

has also been influenced by the work of the Italian-British

economist, Piero Sraffa, who restored some Ricardian classical

theory, where prices are determined by the costs of production.

51

Foundational Economics

The foundational school of economics encompasses all

economic theory, micro, macro, and institutional. It seeks a

comprehensive theory of economics, synthesizing the thought

of all other schools in an integrated, systematic way, with a

foundational based on a set of axiomatic propositions that

apply to all people, times, and places. Pure theory is derived

from these propositions using deductive logic. Specific theory

about particular events, cultures, and economies is based on

pure theory and the institutions and facts about the particular

phenomenon, derived using hypotheses tested by data as well

as deductively. The foundational school integrates moral and

economic concepts, since it recognizes that pure markets

follow moral rules.

The macroeconomic model is that of a pure market

economy on which interventions are imposed. Pure markets

work well, providing for prosperity and full employment. In

accord with the physiocratic and neoclassical schools,

foundational economics agrees that land rent is the efficient

source of revenue for public goods and services. In accord with

classical theory, it agrees with the principles of free trade. Its

trade theory combines neoclassical and Austrian elements for

an integrated theory with real and monetary aspects. It also

accepts the Austrian theory of interest rates based on time

preference and its theory of banking.

Foundational theory encompasses neoclassical

marginal analysis and price theory, but retains the classical

differentiation of the three factors of production. Socialist and

interventionist views are not accepted, since these are believed

to be flawed and/or lacking axiomatic foundations.

Foundational economics is open to theory from any school or

approach so long as its pure theory that can be derived from

axiomatic propositions. It can therefore potentially create a

52

synthesis from the other schools as a comprehensive and

unified theory of economics.

The years of high theory (1930-)

Economics like all other sciences struggle with

recognition, codification and explanation–understanding,

prediction and finally control. The Great Depression exposed

the weaknesses and missing links in neoclassical thought. To

some economists, the Keynesian response is supplementary to

neoclassical economics in the sense that it provided the

neglected aspects in neoclassical thought that explained the

Great Depression in the fallacy of the self-regulating

hypothesis and in particular Say’s law, which states that supply

creates its own demand. To these economists, Keynesian

economics is simply an extension of neoclassical economics –

a couple of innovations in the mainstream economics. But, it is

a lot more modern than this. It quickly and permanently

changed the way the world looked at the economy and the role

of government in society.

The word "economics" is derived from oikonomikos,

which means skilled in household management. Although the

word is very old and the discipline has evolved to the

management of the city, district, local government area, the

Caliph and the modern nation state as we understand it today is

a relatively recent development. Modern economic thought

emerged in the 17th and 18th centuries as the western world

began its transformation from an agrarian to an industrial

society. Despite the enormous differences between then and

now, the economic problems with which society struggles

remain essentially the same:

What to produce with available limited resources?

How best to produce the chosen commodities?

For whom to produce?

53

How to ensure stable prices and full employment of the

available resources?

How to attain balance of payments viability for the

open economy?

How to provide a rising standard of living both for the

current and for future generations (sustainable growth

and development)?

Progress in economic thought toward answers to these

questions tends to have taken discrete steps rather than

evolving smoothly over time. This may be because they are

responding to the issues of the times. As changes in the

economy yield fresh insights a new school of ideas suddenly

emerges and make existing doctrines obsolete, at least

inadequate. The new school eventually becomes the consensus

view, to be pushed aside by the next wave of new ideas. This

process continues today and its motivating force remains the

same as those of three centuries ago: to understand the

economy so that we may use it wisely to achieve society's

goals in the best way possible.

Economic theories are constantly admitting new

insights. When the Great Depression hit, with unprecedented

ferocity, economists were at a loss to explain its causes and

how to overcome it. Prevailing economic orthodoxy stuck to

the old classical view that markets will clear in the long run. At

the height of the crisis, the fledging Labour Government in the

UK was told by Treasury officials that the government must

balance the budget to survive the depression – a severe

recession. This effectively meant increasing taxes and cutting

unemployment benefits. Keynes described this as economic

madness and argued for the exact opposite. He argued in a

recession of this magnitude, it was necessary for the

government to intervene and actively stimulate the economy.

54

In Keynes view output can be below full capacity for a long

time because it was caused by gluts. For example, the Nigerian

economy has been operating under full capacity since the

1980s – over twenty years long, though for very different

reasons.

Apart from a few half hearted attempts such as the new

deal, Keynes' policies were largely ignored in the UK and US;

and high levels of unemployment persisted until the start of the

Second World War. It was at the backdrop of this resistance

Keynes published The General Theory of Employment,

Interest and Money in (1936).

In a sense what is referred to a period of high theory is

period of struggle for apostolic succession by various schools

of thought that have emerged, which has struggled to interpret

the content and importance of Keynes's message. Keynesian

theory, with its emphasis on activist government policies to

promote high employment, dominated economic policymaking

in the early post-war period. Keynes is now known as the

"father of modern economics" because he was the first to

accurately describe some of the causes and cures for recessions

and depressions.

Within the next few years, there were several important

developments. The most crucial was the introduction of the IS-

LM representation of Keynes's theory by John Hicks (1937),

which is an attempt to combine the neoclassical

microeconomics of Alfred Marshall and the macroeconomics

of Keynes. This was to have a very deep impact in both

economic theory and the conduct of economic policy. Hicks'

representation provided a useful and efficient pedagogic device

to popularize the Keynesian Revolution. However, by treating

a subset of Keynes' theory as a system of simultaneous

equations, Hicks' IS-LM was also the beginning of what has

been called a "Neoclassical-Keynesian Synthesis", or "Neo-

Keynesianism", the dominant form of Keynesianism which

55

took hold in America and, for the most part, the rest of the

world.

However, starting in the late 1960s, troubling inflation

and lagging productivity produced a phenomenon tagged

stagflation (to refer to the co-existence of rising inflation and

unemployment), which contradicted the orthodox trade-off

theory and prodded economists to look for new solutions.

From this search, new theories emerged:

Monetarism updates the Quantity Theory, the basis for

macroeconomic analysis before Keynes in its New

Classical incarnation. It re-emphasises the critical role

of monetary growth in determining inflation.

Rational Expectations Theory provides a contemporary

rationale for the pre-Keynesian tradition of limited

government involvement in the economy. It argues that

the market's ability to anticipate government policy

actions limits their effectiveness.

Supply-side Economics recalls the Classical School's

concern with economic growth as a fundamental

prerequisite for improving society's material well-

being. It emphasizes the need for incentives to save and

invest if the nation's economy is to grow.

Post-Keynesian economists maintain that Keynes's

theory is seriously misrepresented both by the

Keynesian and by New Keynesian economics, which

dominates today’s mainstream macroeconomics

alongside neoclassical economics. Post-Keynesian

economics is an attempt to rebuild economic theory in

the light of Keynes's original ideas and insights into

how the economy works. Post Keynesian theory

56

evolves from Keynes’s revolutionary approach to

analysing a money-using, entrepreneur economy. Post

Keynesian economics accepts Keynes’ (1936, chap. 2)

‘Principle of Effective Demand’ as the basis for all

macroeconomic theory that is applicable to an

entrepreneurial economy. The Post-Keynesians are a

heterogeneous group of economists, united solely by

their rejection of the neoclassical synthesis, often claim

the same name to their approach to macroeconomic

modelling, namely Post Keynesian economics.

These theories and others were debated and tested.

Some were accepted, some modified, and others rejected as

economists search to answer the fundamental economic

questions of what to produce with available limited resources?

How to produce? For whom to produce? How to ensure stable

prices and full employment of resources? How to provide a

rising standard of living both for now and the future?

Marc Lavoie’s Introduction to Post-Keynesian Economics has

organised the various theories or approaches to economics into

what is described by Figure 3.

Some writers have reduced all these into five main

methodological subjects of economic science (see Glenn Rayp,

2009), namely, a review of the philosophy of science; the

foundations of value theory; the partial and general

equilibrium approach in economics; the relevance of a

descriptive versus a formal-theoretical approach in economic

57

science; formalism and realism: the mathematical foundations

and the computational approach of economics.

From Political Economy to Dismal Science

The Rev. Thomas Robert Malthus was the first

professional to discuss economics. He was interested in the

relationships among population dynamics, demographic

transition and economic growth and development as well as

their implications for the standard of living. In 1798, he

published An Essay on the Principle of Population,

describing his theory of quantitative development of human

populations and their implications for food consumption per

capita and the standard of living. His postulates were first, that

food is necessary to the existence of man. Secondly, that the

passion between the sexes is necessary and will remain nearly

in its present state. Arguing further, he noted that these two

laws, ever since we have had any knowledge of mankind,

appear to have been fixed laws of our nature, and, as we have

Figure 3: The Evolution of and Relations

among Macroeconomic Theories

Radicals French

Regulation

Macroeconomics

Heterodox Authors Neoclassical School

Marxists Cambridge

Keynesians

Post-Keynesians

Old

Keynesian Monetarists New Keynesian

New Classicals

58

not hitherto seen any alteration in them, we have no right to

conclude that they will ever cease to be what they now are,

without an immediate act of power in that Being who first

arranged the system of the universe, and for the advantage of

Its creatures, still executes, according to fixed laws, all its

various operations.

He went on to say, if my postulates granted, I say, that

the power of population is indefinitely greater than the power

in the earth to produce subsistence for man. Population, when

unchecked, increases in a geometrical ratio. A series that is

increasing in geometric progression is defined by the fact that

the ratio of any two successive members of the sequence is a

constant. For example, a population with an average annual

growth rate of, say, 2% will grow by a ratio of 1.02 per year.

In other words, the ratio of each year's population to the

previous year's population will be 1.02. In modern

terminology, a population that is increasing in geometric

progression is said to be experiencing exponential growth.

Thomas Malthus postulated that population was growing at a

geometric rate (2, 4, 8, 16...) while food production was only

increasing arithmetically (1, 2, 3, 4 ....) and concluded that

food supply would eventually be insufficient to support the

population.

This conclusion led him to oppose the introduction of

the Poor Law and to advocate the protection of agriculture. In

other respects he followed Adam Smith in opposing

government intervention in commerce. Evidence in support of

his postulates was lacking at the time and in some quarters it

was believed to have since been found to be mistaken. His

conclusions rightly motivated a sustainability debate that

questioned whether the world will experience stable or

improving living standards for the foreseeable future, or

whether the existing trajectory will overtax the natural

environment, leading to a ‘crash’ in living standards. In

59

contrast, Malthus believing in his postulates concluded that the

growth of human populations will be naturally checked by

misery, vice or the like in its natural development. Every phase

of unchecked exponential population growth (as might occur

when inhabiting new habitats or colonies, e.g. the American

continent at Malthus' time, or when recovering from wars and

epidemic plagues) will be followed by a catastrophe or misery,

and thus unlimited growth in population may even directly

cause misery and vice (Malthus 1798, chapter 7: A Probable

Cause of Epidemics).

Malthus’ grim prediction of starvation that would result

as projected population growth exceeded the rate of increase in

food supply, is variously referred to as the Malthusian

catastrophe, sometimes known as a Malthusian check,

Malthusian crisis, Malthusian dilemma, Malthusian disaster,

Malthusian trap, or Malthusian limit. Again in 1839, Malthus

repeated his theory in his essay Chartism. Indeed, the

controversies on Malthus and the 'Population Principle', his

'Preventative Check' and so forth, are sufficiently mournful,

dreary, stolid and dismal, without hope for this world or the

next. But, none of these is the science that made the

prediction and therefore the science itself could not be

dismal in any sense of the word. Rather we had a science that

gave humanity a wake-up call, alert and privileged information

to avert a disastrous situation with non-zero probability. At any

rate, science and principles in themselves are holy, pure and

innocent and that is even when they are wrong. After all, it

is said that “Logic is the art of going wrong with confidence”

(anonymous).

Some people think that Malthus was wrong and

believed that his theory has since been found to be mistaken;

overtaken by man’s ingenuity to conquer his environment with

creativity that expressed itself in the Green Revolution and

many other innovations. Further, Malthus did not show

60

evidence of foreseeing these developments. But, is Malthus

wrong? In retrospect, his theory may be viewed inductive. Has

famine ever left mankind alone? History counts at least 50

major Great Famines that resulted in significant losses of

human lives during the time periods for which there are written

records. In ancient Egypt 2686 to 1552 B.C. destructive floods

of the Nile caused famine. Another reference is the seven years

of famine reported in Genesis 41:1– 44:17.

In China it is estimated that 'there was a drought or

flood-induced famine in at least one province almost every

year from 108 B.C. to A.D. 1911 (Mallory 1926). In the

seventeenth century north China, for instance, famines became

common, worsened by unusually cold and dry weather. In the

same region in the 19th century, from 1876 to 1879 nine

million fatalities were caused by famine. Famine continued in

China until very recently. Between 1920 and 1921 in certain

provinces 'at least 500,000 people died, and out of an estimated

48.8 million in five provinces, over 19.8 million were declared

destitute. Between two and three million died in Honan

province in 1943. The bungled reforms of Chairman Mao led

to another massive famine in China. The 'Great Leap Forward'

led to 'famine on a gigantic scale, a famine that claimed 20

million lives or more between 1959 and 1962. Many others

died shortly thereafter, especially children, weakened by years

of progressive malnutrition. China has only just escaped from

famine. South Asia is another area where massive famines

have occurred until very recently. Malthus saw it as one of the

great famine areas of the world: 'India has in all ages been

subject to the most dreadful famines.' The historical situation

was summarized in 1911. 'Famines seem to recur in India at

periodical intervals. Every five or ten years the annual scarcity

widens its area and becomes a recognized famine; every fifty

or a hundred years whole provinces are involved, loss of life

becomes widespread, and a great famine is recorded. In the

61

140 years since Warren Hastings initiated British rule in India,

there have been nineteen famines and five severe scarcities.

Braudel refers to the 'terrible and almost general famine in

India in 1630-1.' He quotes a Dutch merchant: 'People

wandered hither and thither, helpless, having abandoned their

towns or villages. Their condition could be recognised

immediately: sunken eyes, wan faces, lips flecked with foam,

lower jaw.

Another is The Great Famine of 1315–1317

(occasionally dated 1315-1322) was the first of a series of

large scale crises that struck Europe early in the fourteenth

century, causing millions of deaths over an extended number

of years and marking a clear end to an earlier period of growth

and prosperity during the eleventh to thirteenth centuries.

Starting with bad weather in the Spring of 1315, universal crop

failures lasted through 1316 until summer 1317; Europe did

not fully recover until 1322. It was a period marked by

extreme levels of crime, disease and mass death and

infanticide. Due to meteorological conditions there were three

great Japanese famines, namely, 1782 – 1787, 1833 - 1839 and

1866 – 1869. There was the Great Irish Potato Famine of 1845

to 1850, one of the most calamitous and significant events in

modern Irish history, the repercussions of the Great Irish

Potato Famine extended into all areas of Irish life and culture.

An estimated around 800,000 people died of starvation or of a

famine-related disease such as typhus, dysentery, scurvy or

pellagra. A further two million people emigrated. There was

the Australian Great famine of 1932-33 (see Lawriwsky,

2003). But, what about a more recent Sahel famine recorded

after World War II and lasted till 1975 (see Mayer, 1975).

Besides, there have been more recent food crises 2007 – 2008.

For the 2008 episode of food crises, even here in Nigeria,

surprisingly we rioted over the price of bread instead of over

62

the price of garri, amala or fur fur (cassava and yam staples for

Nigerians).

The majority of crop failures that have resulted in

famines are due to unfavorable environmental conditions with

either drought or flooding being the most common causes.

Less frequent, but also occasionally significant causes of

famines are due to insect or disease infestations. Insect pests

(the Emeozor, 2009 problem), like locusts, that can destroy

crops were readily recognized by ancient civilizations and

reliable historical information on insects as causal agents of

famine is fairly common. Obtaining historical information on

plant diseases, however, is not nearly as straightforward. The

Bible and other historical texts refer to blights and blasts that

periodically decimated crops, but information on specific

diseases is lacking. This is understandable since the vital

connection between plant diseases and the microscopic agents,

like fungi and bacteria, that cause diseases remained unknown

until the science of plant pathology was born in the mid-

nineteenth century.

Whatever, the cause, once the demand for food exceeds

food supply, there is food crisis and if the gap is severe, there

is famine, irrespective of the explanation. But even with the

birth of plant science, Green Revolution, the modern methods

of agronomy and the many other innovations in food

production, preservation, conservation and supply, there are

many instances of food demand outstripping supply

manifesting in episodes of food crises and rising food prices,

even as recent as 2008, such that food aid is part of our

lexicon. Thus, the actual indicator of food crisis is the rising

trend in food aid and food prices, which are endemic. Figure 4

below is a queue for food aid.

63

Figure 5 shows the trend in food aid. In 2004 alone,

governments, non-governmental organisations (NGOs), and

the World Food Programme (WFP) delivered over 7.5 million

tons of food, valued approximately US $3.26 billion. The limit

Figure 4: Line for Food Aid; Picture Credit: Associated Press

Figure 5: Global Food Aid Deliveries by Recipient Region

Source: World Food Programme's International Food Aid Information

System (INTERFAIS)

64

of this trend is the Malthusian catastrophe as when food

shortage leads to extreme malnutrition and death as the case

shown in Figure 6.

So, is Malthusian limit mistaken as believed in some

quarters despite the achievements of modern science? I don’t

think so. After all, it has been predicted that the food crisis, a

problem that we faced in 2007 and 2008, will be back sooner

than expected (see China Daily (The National English

Language Newspaper, Tuesday July 7, 2009)). Several reasons

are advanced for this including the Malthusian arguments such

as the growth of world population; a lesser cause is

competition from biofuels for land use. But, with oil prices

rising as it did before the crash, there are strong economic

incentives for biofuel projects and possibilities to compete

Figure 6: The Malthusian Catastrophe

65

with food production and use. Food and Agricultural

Organisation (FAO) estimates that the world will need to

produce at least 50 percent more food in the next 15 years.

Economic development and income distribution in highly

populated countries such as India, Brazil, China and Indonesia

are creating millions of new food consumers despite birth

control measures. Migration and urbanization is leading to the

growth of more mega cities, which is increasing food

consumption and reducing land for agricultural production.

It is not surprising therefore that despite the fact that,

the dismal science terminology is a derogatory alternative

name for what was named Political Economy and is today

referred to as economics devised by the Victorian historian

Thomas Carlyle in the 19th century; the modern world has

found it very wise to adopt the Malthusian checks in the

romantic name of family planning to refer to the use of

modern contraception and other methods of birth control to

regulate the number, timing, and spacing of human births.21

Figure 7 shows a woman being chased by an unwanted baby.

21 In my view the definition should be expanded to include all methods that improve maternal health,

Figure 7: A Woman being chased by an Unwanted Baby

66

Her lot improved only in 1965, when the US Federal

Government made its first grants to support the provision of

family planning services in 1965 as part of the Johnson

administration’s War on Poverty. The major breakthrough

came in 1970 in what was stylized Title X, which sought to

fulfill President Richard M. Nixon’s historical 1969 promise

that “no American woman should be denied access to family

planning assistance because of her economic condition.” Data

show that since 1980, Title X has helped American women

avoid almost 20 million unwanted pregnancies, and has

provided key reproductive health services to millions of

women. Today, family planning clinics are a common feature

the world over.

Admittedly, Attempts to control human reproduction is

not entirely a modern phenomenon. Throughout history,

human beings have engaged in both pro-and anti-natal

practices directed at enhancing social welfare. In many

foraging and agricultural societies a variety of methods such as

prolonged breast-feeding were used to space births and

maintain an equilibrium between resources and population

size. But in hierarchical societies, population regulation

practices did not bring equivalent or beneficial results to

everyone. Anthropologists Marvin Harris and Eric Ross have

shown that "As power differentials increase, the upper and

lower strata may, in fact, develop different or even antagonistic

systems of population regulation". This, notwithstanding,

Malthus has helped to put population regulation in the

consciousness of humanity.

Why and How the Dismal Science Got Its Name

It is often stated that Carlyle gave economics the

nickname "dismal science" as a response to the late 18th

century writings of Malthus. The Carlyle did indeed use the

word 'dismal' in relation to Malthus' theory in his essay

67

Chartism (1839), while Carlyle did indeed use the word

dismal here, it is was not until a decade later that he brought

the adjective into juxtaposition with the noun "science" to give

the sense of the expression we understand it today – a

situation which both threatens the extinction of life on

Earth, and offers no promise. But, this is not the real reason

why Carlyle labeled the then Political Economy “dismal

science”.

The emphasis that classical economists place on

incentives also leads them to reject racial explanations for

social progress. Thomas Carlyle was a well-known English

social critic and essayist, who used this term in an angry

response to the classical economists (the most prominent being

John Stuart Mill) for criticizing his position that slavery should

be continued because blacks were inferior to whites and

incapable of taking care of themselves (the remark occurs in

his "Occasional Discourses on the Negro Question," published

in 1849). Carlyle's argument was, in part, based on the lack of

social and economic progress blacks had achieved in their own

societies. The blatant racism represented in the writings of

Carlyle, and commonly accepted in his day, had long been

criticized by economists going back to Adam Smith. The

classical thought and discourse by positing the equality of the

races and propagating the idea that free market economies

would provide social solutions, argued that slavery was an

unproductive mode of production.

Thus, the dismal science label shows how racial

theorising was used to attack anti-slavery coalition of

evangelists and economists in the mid-nineteenth century

Britain. Classical economists favoured race-neutral accounts of

human nature, presuming that agents are equally competent to

make economic decisions, (see Peart, S. J. and David M. Levy,

2001). Their opponents Carlyle and Ruskin presupposed racial

hierarchy and argued that some people are incapable of making

68

sensible economic or political decisions. They further argued

that those who are systematically poor optimizers will be

victimized in either market or political transactions. Thus, it is

the position of the classical economists that motivated the

assumption of homogeneous agents in mainstream neoclassical

economics for which it is being criticized. Admittedly, agents

are heterogeneous in their capacities for optimisation but the

differences are not necessarily to inherent racial incapacities as

differences are found within the races or racial groups.

The Rise to a Mathematical Science22

,23

In a sense the historiography of mathematical

economics may be said to have been written only in 2002 with

the publication of Weintraub’s How Economics Became a

Mathematical Science, in which he traces from Marshall

forward how high-level mathematics came into and changed

the presentation of modern economics adopting biographical

and scientific approaches to the history of economics.24

But,

many place the beginning of the mathematisation of economic

analysis in 1838 when Antoine Augustin Cournot published

his Mathematical Methods in Economic Investigations in

which he presented the concept of economic equilibrium and

the analysis of monopoly and duopoly as well as the concept of

consumer surplus. Actually, economics became a

mathematical science in Quesnay’s Tableau Économique in

1774 before it became Political Economy in 1776 with the

22 I would have preferred to name this unit ‘the rise to a computation science’, for what makes

economics scientific is not just mathematisation but the entire quantitative methods and

advances in computational technology and devices that have been brought to bear on economic analysis through time. It was William Stanley Jevons who first observed that it was

statistics that was limiting Political Economy from becoming a science. 23 I have relied heavily on the literature, in particular those found on the internet, some of which I am not able to cite and/or reference properly. 24 This author has no direct access to the book, so references are based on excerpts, reviews

and comments on the book. The book itself is a compilation of papers written by the author either singly or with collaborators.

69

publication of the Wealth of Nations by Adam Smith.

Quesnay’s analysis of the product flows in the economy is a

precursor to Wassily Leontief’s work on the input-output

analysis of the American economy that gave him the Nobel

Prize in economics in 1973. Figure 8 shows the geometry of

the Tableau Économique.25

Historically viewed, the period of high theory

coincided with a period when mathematicians were ‘invading’

the field of economics with every refinement in mathematical

technique targeted at applications in economics. This also

coincided with the rise of genuine articulation of a professional

25 If one grafts a system of equtions that describes Quesnay’s flow diagram with litte extension

one would arrive at Walras’ system of simultaneous equations that facilitate general

equilibrium analysis. On the other hand, if one applies matrix algebra with an input-output perspective, (s)he will arrive at the Leontief framework and applications.

Figure 8: Geometry of the Tableau économique and the Value Chain

70

self-consciousness among American economists, who also

demarcated the establishment of an altogether novel protocol

for those experts (examples are the establishment of

Mathematical Economics at Cowles Foundation and the

publication of both Econometrica and The Review of

Economic Studies that began in 1933). This new agenda,

developed with increasing rigour and authority as the twentieth

century beckoned, began a significant reorientation of the

field's object of study. Scientific sophistication necessarily

involved a revision of practice, yet it also encouraged the

articulation of new perceptions of its pedigree in linking the

object of study with particular and venerable authorities

through the ages as a process of importance to the successful

construction of a distinctly professional knowledge.

The interconnection of mathematics and economics

reflects changes in both the mathematics and economics

communities over time. The respective histories of these

disciplines are intertwined, so that both changes in

mathematical knowledge and changing ideas about the nature

of mathematical knowledge have effected changes in the

methods and concerns of economists.26

Mathematics went

through crises and paradigm shifts, which spilled over into

economics which is the key to understanding how

mathematical economics has evolved. The rise of the ultra-

formal Bourbakist School in France, which used ultra-formal,

abstract and axiomatic methodology in mathematics and the

education that Gérard Debreu by some of its founders

facilitated along with the new American agenda for economic

research referred to earlier facilitated the spillover. Thus, the

mathematisation of economics may be viewed as the response

of economic theory to the achievements in science.

26 See the new edition of The New Palgrave, a Dictionary of Economics, published by Macmillan on Mathematics and Economics.

71

Understanding the nature and role of mathematical economics is not the same as understanding the connection between mathematics and economics. Mathematical economics, as Debreu argues is the employment of mathematics in economics itself. Explaining or justifying mathematical economics often involves essentialist arguments concerning the true nature of economic objects, and the true nature of the economy, as well as arguments suggesting that employing mathematics is appropriate since the underlying “economy” is quantitative in nature. Consequently an historical discussion of mathematical economics will be a narrative of increased sophistication over time in economics as mathematical tools, techniques, and methods are refined and move into economic discourse and enrich economic analysis.

In a sense, mathematics is incarnate in economics. For example, a roadside trader selling roasted corn in determining her sales revenue is working with the equation PQ = R (P = price per unit, Q = quantity sold and R = sales revenue) and if she sells the roasted corn with other items such as roasted fish, pear, and/or water, then, she is working with the equation

RQP i

n

i

i , (where i = 1, 2, …, n; Pi = price per unit of item i,

Qi = quantity sold of item i and R = total sales revenue); that is whether she is conscious of it or not. Figure 9 shows this tendency with the help of commonly available technology just like traders in the New York Stock Exchange.

Figure 9: Mathematics in Business &

Economics

72

According to Wikipedia the use of mathematics in the

service of social and economic analysis dates back to the 17th

century. Then, mainly in German universities, a style of

instruction emerged which dealt specifically with detailed

presentation of data as it related to public administration. The

development of mathematical economics started from a

humble beginning with numerical examples to the application

of algebra and calculus with the Marginalist Revolution in the

19th

century, which accelerated in the early 1930s to the

present. Of these, one of the most impressive has been the

steadily increasing sophistication of the mathematical tools

used by economic theorists. To calculus and matrix algebra

were gradually added, a non-exhaustive list, game theory,

linear programming, operations research, set theory, convex

analysis, general topology, algebraic topology, measure theory,

infinite-dimensional vector space theory, global analysis,

optimal control theory, nonstandard analysis, fixed point

theorems, application of mathematical proof making –

axiomatic proofs and probability theory, etc. Simultaneously,

as economic theory was axiomatised, exacting standards of

logical rigour became the rule rather than the exception. The

Figure 9A: Traders on the floor of the New York Stock Exchange.

Source: AP Photo

73

sweep of the recent evolution of mathematical economics may

tempt one to find in that historical process an inevitable

concatenation of events and to overlook the major accidents

that altered its direction and/or increased its momentum. But

historical determinism does not fully explain John von

Neumann's interest in game theory and in economics as well as

the circumstances that led to his collaboration with Oskar

Morgenstern. Nor does it explain the role played by

institutions and other individuals.

By mathematical economics, economic theory is

transformed into a compact and precise mathematical form by

using appropriate mathematical functional form. For example,

the law of demand tells us that when other things do not

change the price and quantity demanded are inversely related.

As a first approximation to this demand law, economists often

use linear equations of the type q = α + βp; a > 0, β < 0 to

make the analysis simple. To depict the needed convexity

shape of the indifference curve, economists use rectangular

hyperbolic functional form. To state the behaviour of the total

cost, economists often use cubic functions. Once such

transformations are made, it is often possible to derive

interesting further properties from the said mathematical

functional form. But, this has nothing to say about the

appropriateness or adequacy of the framework being adopted.

Further, it is important to note that mathematical

economics is not a separate branch of knowledge by itself. It is

simply an approach used in economic analysis very frequently.

Thus, mathematical economics is an approach used in almost

all the branches of economics. Yet, one must remember that

mathematical economics is not merely an alternative way of

representing economic theory. The very purpose of such a

transformation is not only to make the theory easy to handle

but also to derive certain interesting characteristic results. For

example, after transforming both demand and supply functions

74

into simple linear mathematical form, it is possible to easily

calculate both the equilibrium price and the quantity.

Similarly, it is possible to calculate the appropriate tax rate that

gives maximum tax collection to the government, etc. It is

important to note that such typical questions can be answered

more precisely only by using mathematics. Therefore

mathematical economics can always be considered as

complementary rather than competitive in economic analysis.

Advantages of Using Mathematics in Economics

1. The mathematical language by nature is concise and

precise. Hence by using mathematics, it is possible to

restate economic theory in a more compact form like

the one stated above to represent the law of demand. In

it, the relationship involved is simple and self-

explanatory in its mathematical form.

2. It allows formulation and derivation of key

relationships in a theory with clarity, generality, rigour,

and simplicity.

3. The mathematical simplicity enhances the precision of

analysis like the calculation of equilibrium price,

equilibrium quantity, price elasticity of demand, etc.

4. Mathematics allows economists to form meaningful,

testable propositions about wide-ranging and complex

subjects which could not be adequately expressed

informally. Further, the language of mathematics

allows economists to make clear, specific, positive

claims about controversial or contentious subjects that

would be impossible without mathematics.

75

5. Mathematical economists can always have the added

advantage of using the ever growing unlimited amount

of tools and theorems in pure mathematics. The use of

Euler’s mathematical theorem in economics in

explaining the distribution of income among the factors

of production is a classical example for such an

advantage.

6. Once a certain specific mathematical relationship is

obtained, the mathematical economists can deduce

interesting and more useful new propositions and

theories by applying suitable mathematical methods.

7. The application of mathematics to economics helped

the development of rigour in measurement and

description.

8. The biggest advantage of mathematical economics is

its ability to handle large number of variables at a

given point of time. For example, in the theory of

consumption especially in indifference curve analysis,

at the most one can handle only two commodities, one

along the x-axis and one along y-axis. But in reality our

consumption basket contains a large number of

commodities. Mathematical economists can handle this

situation by increasing the commodity space to

accommodate any number of commodities in getting

the extended equi-marginal equalities (principle).

76

Disadvantages of Using Mathematics in Economics, Misuse

and Abuses

1. In certain sections of economics, variables such as

tastes, preferences, etc. are qualitative in nature and as

such are not measurable, yet quantifiable, which make

the use of mathematical techniques difficult.

2. The most common criticism levelled against

mathematical economics is about its abstract nature, in

particular axiomatic mathematics. However, generally

speaking, the abstract results are due to the use of

unrealistic assumptions and not due to the use of

mathematics per se. Therefore, whenever the

assumptions of the theory are more realistic, less will

be the abstract nature of the theory both in

mathematical and in nonmathematical presentations.

Despite, these weaknesses, in its mathematical form,

economic theory is open to an efficient scrutiny for logical

errors.

Use of Statistical Methods in Economics

Statistics is another important branch of knowledge

having wider applicability in economics. Since very often

economic theories are constructed on the basis of real world

observations, statistical analysis plays a crucial role in the

development of economic theories. To quote Marshall

“Statistics is the straw out of which I, like every other

economists, have to make my bricks”. It was Jevons who first

observed that it was statistics that was limiting the scientific

nature of Political Economy. In fact the quantity theories of

money have undergone drastic revisions after being tested for

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their reliability or otherwise now and then by using the real

world data. Thus statistics plays a unique role in testing

economic theories empirically and in promoting the scientific

nature of economics.

Importance of Econometrics

In recent times another quantitative approach, called

econometrics, has emerged as an important tool in economic

theorizing. The empirical content and policy significance of

economic theories are the two important faces of this new

approach. The socialist economist, Oskar Lange defines

econometrics as “The science, which deals with the

determination of quantitative laws occurring in economic life.”

Mathematical economics plays an important role in

translating the verbal economic theories into its mathematical

form. Econometrics in combining economic theory,

mathematics and statistical techniques provides the necessary

tools in testing the so-obtained mathematical statements of the

concerned theory. Thus it is a branch of knowledge that deals

with the empirical measurement of economic relationships

listed out in economic theories for purposes of hypotheses

testing. For example, the linear demand equation given above

is only a restatement of the date old demand law in its simplest

mathematical form.

Econometrics proceeds further in this direction by

measuring the tightness of this inverse relationship using the

statistical tools like correlation or better still regression

analysis among other methods. It is also used to test the

reliability of the inverse demand law by using statistical tools.

Once the reliability of the relationship is established the so-

obtained relationship is used to forecast the likely changes in

quantity demanded for an expected change in price on a future

date. This is the practical utility of econometrics. Its results

can be used for prediction and control purposes.

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One must remember that before testing a theory for its

reliability, it must first be translated into a suitable

mathematical form. It is also true that the statistical tools are

commonly used in econometrics. So, econometrics is indeed a

trilogy among economic theory, mathematical formulations

and statistical techniques. Thus the basic relationships, which

are analyzed in econometrics, are economic relationships

expressed in mathematical form, which are measured using

statistical techniques. Hence, for a good understanding of the

subject “econometrics” one must be good enough in economic

theory, in addition to competence in the use of mathematical

and statistical tools. In facilitating the measurement of

economic relationships, it helps in causality testing.

However, the development of econometrics as a field

of knowledge has been greatly facilitated by advances in

computing power and availability of algorithms to analyse

data, which have made possible more sophisticated use of data.

Thus, it is the entire gamut of quantitative economics and

computing technology that has made economics the science

that it is.

What type of Science?

Is Economics a Science?

First, is the question of whether economics is a

science? This is one question that people have been asking

themselves throughout time and many doubt if economics can

be considered a science, (Martie, 2009). Even the Nobel Prize

in Economic sciences instituted by the Sveriges Riksbank (the

Central Bank of Sweden) in Memory of Alfred Nobel, which

has been awarded 41 times to 64 Laureates between 1969 and

2009 to some is not so Nobel, a good example is Brittan

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(2003).27

Some say that economics combines elements of both

science and art given that economists try to develop analytical

mathematical models which seek to explain economic

behaviour in a way that can be theoretically proved (see

www.blurtit.com/q761673.html accessed 20/9/09). But, linking

theory to the real world is always going to be a very subjective

experience. Economists face very serious difficulties in testing

their theories because of the complexity of the subject matter

and because of the presence of a lot of disturbances. So, as

Hausman (1994) asserts, they are right in trusting more in the

implications deduced from the axioms of their theories than in

the negative results which may emerge from empirical testing.

For this reason, it is very rare to see a theory disregarded

because of an apparent refutation, (Beker, 2005). In economics

uncertainty is the rule. Fortunately, at least, some economists

are well aware of the limitations of their analyses.

For the anarchists who question the realism of

economic assumptions, in the main, economics is not a

science. But, they are not alone. Among the critics are even

economists, even notable economists are among their numbers.

For example, Mark Blaug is quoted as saying "no time

[should] be wasted defending the assertion that economics is a

science", (John, 2009). Some say it is debatable whether

economics should actually be defined as being a science like

Mathematics or Physics.28

Since these disciplines usually gets

their satisfaction from proving something to be irrevocably

27 In my view, these awards represent the recognition seminal work by the awardees and the schools of thought they help to lead as well as motivation for distinction and excellence in

analytical economics and of course with implications for policy applications of their.

Unfortunately, the criticisms of the Award are confusing issues for The Royal Swedish Academy of Sciences – the Awarding body. If some entity institutes an award for a specific purpose and is accepted, is for them to follow through with the conditions of the engagement

and not to waiver and award it to any and persons in the social sciences. 28 Ironically, in many universities mathematics is regarded as an art.

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true.29

Solve a complex equation and quod erat demonstratum

(QED), that’s the answer, there’s no argument. Economics on

the other hand, critics say, will rarely give a simple answer.

Ask 5 economists a question and the joke goes you will get 6

different answers.30,31

What is wrong with this perspective is

that first the comparison is odious. Economics is different from

physics, mathematics, chemistry and biology. Accordingly,

there are cultural differences between natural scientists and

economists and these should be obvious and acceptable.

Therefore, assessments of economics should speak to its

nature. Given economics' peculiarities it does not seem

reasonable to judge its scientific character on the basis of its

ability to use the methods and procedures of the experimental

sciences in exact manner. It seems more reasonable to analyze

how to satisfy the requirements of the scientific methodology

taking into consideration its particularities as a social science.

There can be analogies leading to generic use of concepts and

methods, but that is a different matter. Second, it forgets that in

computational mathematics, many solutions are

approximations, which in essence means we don’t know the

answers. So, how exact is mathematical science is a pertinent

question. There are people who do not even consider

mathematics as a science.

In line with the above criticism, some say economics is

not a science as it cannot produce “universal (natural) laws or

constants”. For example, Luskin (2006) questions: “Where is

the utterly essential ingredient of repeatable experimental

verification of falsifiable hypotheses? Without that – and

29 But, this only means that physical science theories are yet to be contradicted by available

evidence. With objects as heavy as humans floating in outer space, wouldn’t the Law of

Gravity be properly rephrased as ‘everything that goes up will come down within the stratosphere?’ 30 There is a plausible explanation for this. Economists think in terms of alternatives and given

the inability of any human being to see and think at 360O–degrees vision, variations exist. 31 I am surprised it is not ten answers since economists always have two hands.

81

economics surely doesn't have it – there can be no claim to

science or the scientific method.” First, Luskin seems unaware

of the existence of experimental economics that has become a

discipline. After all, Vernon Smith won the 2002 Nobel Prize

in economics jointly with Daniel Kahneman for his work in

experimental economics. Second, in my view, what is essential

is the availability of relevant data for verification and not the

particular method of data production or acquisition, per se. In

the least, economics uses observational data produced by

natural experiment (see Bloom, 2008). Further there are many

non-experimental sciences that use the data that history

provides such as astronomy, which studies the creation of

galaxies that cannot design experiments but only observe

limited conditions. Another example is evolutionary biology

that studies the development of species; also behavioural

biology relies upon fieldwork in uncontrolled environments.

At any rate, not even all aspects of physics are open to

repeatable experimental verification or falsifiable hypothesis.

After all, each of the current "hard sciences" suffered a similar

"lack of rigour" in its own infancy.

John (2009) has argued that the empirical background of

economic science is definitely inadequate. Our knowledge of

the relevant facts of economics is incomparable to those in

other sciences. This begs the question: what quantity of data or

empirical background is adequate for science? However he

believes that if economists can start with problems contained

in the very simplest facts of economic life and try to establish

theories which explain them and which really conform to

rigorous scientific standards, then, we can have enough

confidence that from then on the science of economics will

grow further, gradually comprising matters of more vital

importance than those with which one has to begin. My

question is what does the history of thought and methodology

in economics reveal? He argues further, although mathematics

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has actually been used in economic theory, perhaps even in an

exaggerated manner, its use has not been highly successful.

This is contrary to what one observes in other sciences. Thus,

he disagrees with von Neumann and Morgenstern's Theory of

Games and Economic Behaviour and their conclusion that

economics is a science. To decide if economics, as a science, is

solid enough to explain and predict the effects of different

actions, we must first know what exactly science is (Martie,

2009, http://econosofia.wordpress.com/2009/03/22/is-

economics-a-science/).

What is Science?

Philosopher Karl Popper's widely accepted definition

of science says that a statement is scientific only if it is open to

the logical possibility of being found false. This definition

means that we evaluate scientific statements by testing them,

by comparing them to the world about us. The corollary of this

is that a statement is nonscientific if it takes no risk of being

found false; that is, if there can be no way to test the statement

against observable facts or events. Popper called this

distinction the "line of demarcation" (see Schenk, 2009). An

implication of Popper's definition is that one can never be

completely sure that any scientific theory is true. Accepted

scientific theory is only theory that has not yet been

contradicted by evidence, though the future may bring a

contradiction. That is, the fact that all previous experience has

been consistent with the statement does not prove that the

statement will never be refuted. After all, we are told science

consists of the endless process of trying to falsify hypotheses.

Popper saw the growth of scientific knowledge as a

process of conjecture and refutation (see

http://www.ingrimayne.com/econ/Introduction/Science.html

15/07/2009 accessed 20/08/09). If this is anything to go by

then science progresses not by the old adage of funeral by

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funeral or Mankiw (2006) proposition of retirement by

retirement but by succession by succession. Thus, as Clower

(1994) asserts progress in economics features Kuhnian

anomalies. However, succession is not by a ‘free pass’ but by

struggle and competition such that competitive theories exist

side by side. At a more fundamental level, knowledge is

relative (to time and space) approached in slices, which makes

it incremental and cumulative given that we do not see at

360o–degrees vision. For these reasons theories are both right

and wrong at the same time. But, they all provide some

insights and some are useful.

Mannan (1983) asserts that “the touchstone of science,

we all know is its methodology not its conclusions”. The

scientific method is what makes science respectable. But the

scientific method has also a serious draw back in that it is not

capable of studying everything. What then is the scientific

method?

Figure 10: The Scientific Approach

MAKE PREDICTION THAT CAN BE USED FOR

CONTROL

EXAMPLES & INTUITION

THEORY

CONFIRMED

REJECTED OR NEW

OBSERVATIONS TO BE

EXPLAINED

IMAGINED PROBLEMS AND/OR SCENARIOS

SET OF

CONCLUSIONS

SET OF ASSUMPTIONS

LOGICAL ANALYSIS

VERBAL ANALYSIS MATHEMATICAL ANALYSIS

EXPLAIN OBSERVATIONS

QUANTITATIVE ANALYSIS

TEST VALIDITY OF THEORY

NEW THEORY

OBSERVATIONS

84

Figure 10 presents a summary of the scientific process.

Science is both a process of gaining knowledge, and an

organized body of knowledge gained by the process. The

scientific process is the systematic acquisition of new

knowledge about a system. This systematic acquisition of

knowledge is generally the scientific method, and the system is

general in nature. Science is also the scientific knowledge that

has been systematically acquired by the scientific process

(Science Journal). These features of science are essentially

captured by Figure 10. But science is different things to

different people. For example, what natural scientists call

theory are facts, whereas theory in economics refers to ideas.

Main stream economics start with ideas and end with data

analysis for purposes of verification. Yet, there are common

treads or features even if in generic form. Consequently, the

term "science" is sometimes pressed into service for new and

interdisciplinary fields that make use of scientific methods, at

least in part, and which in any case aspire to be systematic and

provide careful explorations of their subjects, including

computer science, library and information science, and

environmental science. Mathematics and computer science

reside under "Q" in the Library of Congress classification,

along with all else we now call science (ibid.).

Generally speaking, in my view, economic analysis is

reasonably compliant with the scientific method; though not all

aspects or branches of economic analysis is equally compliant.

There are many branches in economics at differing stages of

methodological development. However, some writers tend to

think that the two methods of generalizations in scientific

enquiries – deduction and induction – are mutually exclusive.

This is not obvious in Figure 10. The explanation of the past

and the prediction of the future are not different operations, but

the same worked in opposite directions, the one from cause to

effect, the other from effect to cause. As Schmoller (1838 –

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1917) says, "to obtain knowledge of individual causes we need

induction; the final conclusion of which is indeed nothing but

the inversion of the syllogism which is employed in deduction.

Induction and deduction rest on the same tendencies, the same

beliefs, and the same needs of our reason." The economists

approach to scientific economics recognizes that deductive and

inductive methods are inseparable aspects of one goal, the

production of scientific knowledge.

According to an academic definition, science is the

organised body of knowledge that is derived from observations

of natural events and conditions that can be verified or tested

by further investigations (Martie, 2009, ibid.). Both Figure 10

and practice show that economics is compliant, at least

reasonably so. Economics became an organised body of

knowledge when it became separate branch of knowledge as

Political Economy in 1776 referred to by its proponents and

practitioners as science because it met the essence of the above

definition. At any rate, the word science comes from the Latin

word, scientia, which means knowledge. Until the

Enlightenment, the word "science" (or its Latin cognate) meant

any systematic or exact, recorded knowledge. "Science"

therefore had the same sort of very broad meaning that

"philosophy" had at that time (ibid.). Sometimes, the

distinction is made between, for example, "hard sciences" and

"soft sciences," which speaks to relativity.

Nelson (2005) asked if economics is a natural science

in which she questions the distinction of advocates for a more

socially responsible discipline of economics that emphasize the

purposive and unpredictable nature of human economic

behaviour, contrasting this to the presumably deterministic

behaviour of natural forces. She argues that the distinction

between “social” and “natural” sciences is in fact

counterproductive, especially when issues of ecological

sustainability are concerned. She believes that in drawing such

86

a line, they draw on intellectual habits of using dualisms such

as culture vs. nature, mind vs. body, human vs. animal, and

freedom vs. determinism which have a long history in post-

Enlightenment Western thought. She argues that this kind of

dualistic approach creates gaps that are inevitably difficult to

jump over or consistently bridge. What is needed instead, she

maintains, is a better notion of science – “science-with-

wonder” – which grounds serious science in relational, non-

Newtonian thinking. So, she does not agree with the metaphor

that economies can be modelled as mechanical and

deterministic machines working according to given laws and

the neoclassical economics extremal approach to economic

analysis, which she regards as profoundly reductionist. But,

outside reduction wouldn’t we be assuming omniscience (all

knowing)? The pertinent question is this a plausible

assumption? In my view, what needs to be addressed is how

much reduction is acceptable, which no one seems to address. I

believe the answer is variable to cases.

Over the course of human history, people have

developed many interconnected and validated ideas about the

physical, biological, psychological, social and economic

worlds. Those ideas have enabled successive generations to

achieve an increasingly comprehensive and reliable

understanding of the human species, their behaviours in

different environments. The means used to develop these ideas

are particular ways of observation, reasoning, experimentation,

and validation. These ways represent fundamental aspects of

the nature of science and reflect how science tends to differ

from other modes of knowing. Economics is an observational

theoretical and applied social science, which is increasingly

becoming experimental, at least in its core aspects, namely,

market phenomena (see Roth and Kagel, 1999) supplemented

by market design studies. More importantly, experimental

economists have uncovered the basic principles of economics.

87

The laws of demand and supply might be the best examples.

These principles, which predict the price and volume of

ultimate market equilibration, work with amazing accuracy

under appropriate conditions. This is particularly true once the

distinction is made between short run dynamics that obstruct

market clearance and the long term tendency of market

clearing.

Further, it is the union of science, mathematics, and

technology that informs the scientific endeavour and makes it

so successful. Although each of these human enterprises has a

character and history of its own, each is dependent on and

reinforces the others. Accordingly, the discourse should draw

from portraits of science, mathematics, and technology that

emphasise their roles in the scientific endeavor and reveal

some of the similarities and connections among them.

The terms "hypothesis", "model", "theory" and, "law"

have a different use in science to colloquial speech. As

Foldvary puts it, model is a small-scale replica of the ‘larger

real-world’. Scientists use the term model to mean a

description of something (structural relationship(s) in

economics), specifically one which can be tested by

experimental or observational data that can be used to make

predictions. A scientific model is a set of concepts,

assumptions and propositions, which, like maps, demonstrate

the main features of the phenomenon being analysed. A

hypothesis is a contention that has not (yet) been well

supported nor ruled out by falsification. A physical law or a

law of nature is a scientific generalisation based on empirical

observations.

Mathematics is an essential language of science but it

does not make a science. The most important function of

mathematics in science is the role it plays in the expression of

scientific models. Observing and collecting data for

measurements, as well as hypotheses testing and predicting,

88

typically require mathematical models and extensive use of

mathematics and statistics. Mathematical branches most often

used in science include algebra, calculus and statistical tools

and techniques, although virtually every branch of

mathematics has applications, even "pure" areas such as

number theory and topology. After all, Kapur (1965:3) asserts

that every science evolves in three stages, namely,

the descriptive stage involving the verbal description of

observed facts with the use of quantitative techniques

being almost nil.

The predictive stage - the stage at which the science is

capable of making verifiable statements in the forms of

hypotheses about events which may have occurred but

not yet observed or has not occurred at all. At this stage

the scientific method informed by mathematical logic

has become essential, for a theory is necessary for

prediction which comes from understanding. This in

turn comes from explanation - the main function of

theory. Besides, from theory come conclusions as

theorems are deduced from mathematical axioms. And

the control stage at which the science has developed

through time to acquire the capability for controlling

the behaviour of the variables characterizing the

relationships which it studies. Economics, particularly,

microeconomics and macroeconomic engineering (see

Mankiw, 2006) have reached this stage of

development.

In my view, what we have is an economic science that

uses mathematics as a reasoning tool and one of its languages

89

of communication. This perspective sees mathematics as

performing instrumental function in economic analysis.

Martie argues that even if we take into consideration

that science is just “the belief in ignorance of experts” one

thing is certain: because in large part economics reflects

human beliefs we might think that it is not a science in the way

that physics, chemistry or mathematics is. We all agree with

the fact that economics rely on past experiences and that it is

based on mathematical theories applied to conditional

scenarios. But, if economics is a science why can’t economists

predict tomorrow’s economy and sometimes they can’t even

agree on the present situation? He went on to answer his

question. “I believe that the answer is simple: people are the

reason for a changing economy. We often behave in ways that

are unpredictable as a consequence of our emotional reaction

to different situations and the decisions we make are not

always compatible with an economic behaviour. Furthermore,

economics is a complex system with multiple interacting

causes and, as a consequence, sometimes, economists have to

reduce the number of variables to simplify the situation in

order to create a model. But ending up this way might lead to a

model relied on unrealistic assumptions and the discrepancy

between it and reality would be unavoidable. Moreover, there

are a lot of situations when causes and effects are no longer

related. As a result, this attempt to concretize the abstract

human behaviour may fail and give us the false sensation that

economics lies. To conclude, I believe that economics,

although is rather more observational than experimental and

inevitably limited, is clearly a science which has a great impact

on the course of our lives”, (Martie, 2009, ibid.).

However, to say that economists cannot say anything

about the future is not true. The conclusions of economic

theories are largely predictive in nature – they deal with

consequences; so, are the results of forecasting and simulation

90

exercises quite different from predictive accuracy where errors

arising from many sources could become serious issues.

Further, a theory is not supposed to replica reality, otherwise it

becomes a tautology. It is a metaphor, which like a map is

different from the reality it represents and this is the root of

falsifiable hypotheses in economics. Yet, it is intuitively

admissible that the closer the assumptions of a theory are to

reality, the most likely will be its predictive accuracy.

Given the recent gruesome experience – the subprime

bubble induced financial meltdown and its sequel, the global

recession, some ask, if economics is a science, why didn’t

many economists see it coming? Prudential guidance and risk

management principles and practice show that these kinds of

crises can be avoided. Bankers neglected them, crisis ensues

and economists are to be called short-sighted. Besides, the

question is: don’t we see the hurricanes and tornados coming,

do we stop them? According to Ibn Khaldun (732-808

AH/1332-1404 C.E.) of Tunisia growth and decline are the

various stages through which every society must pass. So, the

business cycle and macroeconomic volatility are by his insight

to some extent natural. But, economists have found ways to

moderate and dampen them and to accelerate recovery. The

reference is to the Keynesian interventionist policies.

The question critics of economics fail to ask is: what

would have been the outcome or situation in the absence of

economic theories and policy prescriptions? The answer is

counter factual yet pertinent. Equally important, is that

economists are technocrats who add to the database to inform

policy. They do not enforce their policy recommendations.

What policy- and decision-makers (mostly politicians, who

politic) as well as implementers (who may be self-serving or

rent-seeking) and their misinterpretations, do with the

prescriptions, which may be different from the prescriptions,

determine actual outcome(s). It is like a doctor’s prescription

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to his/her patient, who either takes an overdose or under-dose

or not all such that the drug is not effective or complications

are created and the doctor is blame for all that. A good

example is the Nigerian Structural Adjustment Programme

(SAP) in the late 1980s – we gave it a human face (under-

dose) and the problems are still with us. You bailout AIG and

it fritters the bailout money on bonus payments to those who

caused the company’s failure in the first place and things don’t

workout. Who is blame? Economists? For the failures of

policy and predictions in the face of uncertainties and

uncontrollable disturbances, critics deny economics is a

science.

Cowen (2004) thinks differently and asserts that

economics is surely a science. He argues “economists have

produced empirical knowledge which is subject to the process

of testing, broadly interpreted, and feedback. We even now

have controlled experiments. While competing fields such as

String theory is yet to be empirical. Environmental science and

ecology are rife with ideology. Astronomy doesn't have

controlled experiments. And isn't chemistry just plain outright

boring? There is plenty of empirical economics I don't trust,

but usually it is for quite hackneyed reasons (example, data

mining), rather than for "intrinsic to economics" reasons.”

In 1940, von Neumann and Morgenstern formally and

publicly recognised economics as a science followed by the

Bank of Sweden, which instituted a Prize in Economic

Sciences in memory of Alfred Nobel in 1968. In 2004, The

Royal Society recognised economics as a science by the

election of Sir Partha Sarathi Dasgupta, an economics

professor at Cambridge, as a fellow. As Professor Cowen puts

it, "I guess the reason that I think economics is a science is that

empirical testing is a huge part of economics, i.e., if economics

were only about the mathematical models, without falsifiable

claims, I would agree it's not scientific. But economics makes

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falsifiable claims all the time and tests them frequently. And

some are confirmed repeatedly, and they become accepted

wisdom. Others are falsified, and they fall by the wayside. Isn't

that what science is all about?" To recapitulate, economics is

an observational social science that is increasingly becoming

an experimental science in its core – market analysis (see

Kagel and Roth, 1995).

The Preconceptions of Economic Science

Almost from its beginning, economics has been viewed

as a morally flawed discipline, even if an important one.

Probably the most stinging rebuke was hurled in 1849 when

Thomas Carlyle referred to economics as "the dismal science",

(Lee and McKenzie). Economics (as Political Economy) is

founded by a moral philosopher and major developments are

led by mostly non-economists (physicists, mathematicians,

engineers, medical scientists, biologists, chemists, statisticians,

etc.) such that people query why it is not one type of science or

another. Some, for example Alvey (1999), believes that

economics is a moral science. Admittedly, Adam Smith tended

to develop economics as a moral science and up to the

beginning of the twentieth century many envisioned economics

as a moral science, in theory and/or in practice. Economics is

not moral beyond specifying the rules of the game and creating

a level playing field for all players. Further, the emergence and

influence of positivism in economic analysis has reduced the

content of values in theory. This is not to argue that economics

is free from ethical concerns, certainly normative economics is

not. For this reason some ethical standards are required. But,

the essence of production economics is that all activities that

create utility for someone else is productive. This statement

does not have so much regard for legality and morality of

actions of economic agents. Property rights, their protection

and enforcement fill the gap. However, Levitt and Dubner

93

(2006: 11) argues that “if morality represents how people

would like the world to work, then economics shows how it

actually does work.”

In 1898, Veblen asked the question: "Why is

Economics Not an Evolutionary Science?" addressing M.G. de

Lapouge’s statement to the effect that "Anthropology is

destined to revolutionise the political and the social sciences as

radically as bacteriology has revolutionised the science of

medicine." In so far as he speaks of economics, the eminent

anthropologist is not alone in his conviction that the science

stands in need of rehabilitation. Veblen himself did not buy

into the criticism (see in particular Veblen (1899)) but thought

that postulating an economic science should rely more on the

analysis of economic change rather than being a simple

taxonomy of axioms and – more or less rigorously drawn

logical conclusions. This some interpret as a critique of the

dogmatism in and the static nature of economic theory (see

Kapeller, 2007). This, however, is an interpretation that

Veblen rejects. The history of economic thought reveals that

the development of the schools of thought and methodology in

economics is recognition of change in the economy requiring

new insights and explanations.

Kapeller (ibid.) revisits the Veblen question believing

that economic analysis is locked into an ahistorical conceptual

framework. It is also revisited by Saad (2009) in reviewing

Shermer (2008), The Mind of the Market: Compassionate

Apes, Competitive Humans and Other Tales from

Evolutionary Economics that addresses ways by which

evolutionary theory and biological formalisms might inform

economic analysis? My question is what else economics is

after the evolutionary spiral in the many dimensions that it has

grown through time and space as exemplified by the partial

historical narrative in section 3 above. It has evolved from the

94

science of household affairs to that of the modern nation state

as we know it.

It is intriguing that while a good number of people are

criticising physics imitation, which some extremists have

derogatorily dubbed “physics-envy”, physicists are busy

addressing questions of economic organisation and function

suggesting new approaches to economics and broadening the

scope of physics, (see Farmer et al (2005) Is Economics the

Next Physical Science?. A good number of physicists are

actively involved in an emerging field of econophysics, and

two new journals and frequent conferences are devoted to the

field, they reported. Besides, Physics departments worldwide

are granting PhD theses for research in economics and in

Europe several professors in physics departments specialise in

econophysics, the report continued.

Econophysics is an interdisciplinary research field,

applying theories and methods originally developed by

physicists in order to solve problems in economics, usually

those including uncertainty or stochastic processes and

nonlinear dynamics. Its application to the study of financial

markets has also been termed statistical finance referring to its

roots in statistical physics (Wikipedia, 2009). Most recent

history dates it to the mid 1990s because that is when several

physicists working in the subfield of statistical mechanics

decided to tackle the complex problems posed by economics,

especially by financial markets. The term “econophysics” was

coined by H. Eugene Stanley in the mid 1990s, to describe the

large number of papers written by physicists on the problems

of (stock) markets that first appeared in a conference on

statistical physics in Calcutta in 1995 and the publication that

followed. The inaugural meeting on Econophysics was

95

organised in 1998 in Budapest by Janos Kertesz and Imre

Kondor (ibid.).32

However, analogies in physics influenced the

development of economic theory way back to the 18th century.

If "econophysics" is taken to denote the principle of applying

statistical mechanics to economic analysis, as opposed to a

particular literature or network, priority of innovation is

probably due to Farjoun and Machover (1983). Their book

Laws of Chaos: A Probabilistic Approach to Political

Economy proposes dissolving (their words) the transformation

problem in Marx's political economy by re-conceptualising the

relevant quantities as random variables. If, on the other hand,

"econophysics" is taken to denote the application of physics to

economics, one can already consider the works of Léon Walras

(1694-1774), Daniel Bernoulli (1700–1782), Pierre-Simon

Laplace (1749-1827), Joseph Fourier (1768-1830), Vilfredo

Pareto (1848–1923) and Irving Fisher (1867-1947) as part of

it. Bernoulli introduced the idea of utility to describe people’s

preferences, while Laplace in his Essai Philosophique sur les

probabilities (1812) pointed out that events that might seem

random and unpredictable such as number of letters in the

Paris dead-letter office can be quite predictable and can be

shown to obey simple laws. Laplace’s ideas were further

amplified by Lambert Adolphe Quetelet (1796-1874), who was

a student of Fourier and who studied the existence of patterns

in data sets (data mining) ranging from the frequency of

different methods for committing murder to the chest size of

Scottish men. It was Quetelet, who, in 1835, coined the word

“social physics”.

Indeed, as shown by Ingrao and Israel (1990), general

equilibrium theory in economics is based on the physical

32 This discussion is taken from or depends extensively on http://en.wikipedia.org/wiki/Econophysics and Farmer et al (2005).

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concept of mechanical equilibrium. It should be noted that

econophysics has nothing to do with the "physical quantities

approach" to economics, advocated by Ian Steedman and

others associated with Neo-Ricardianism.

The practitioners applied tools and methods from

physics - first to try to match financial data sets, and then to

explain more general economic phenomena. One driving force

behind econophysics arising at this time is the availability of

huge amounts of financial data, starting in the 1980s. It

became apparent that traditional methods of analysis were

insufficient - standard economic methods dealt with

homogeneous agents and equilibrium, while many of the more

interesting phenomena in financial markets fundamentally

depended on heterogeneous agents and far-from-equilibrium

situations.

The basic tools of econophysics are probabilistic and

statistical methods often taken from statistical physics. Models

of Physics that have been applied in economics include

percolation models, chaotic models developed to study cardiac

arrest, and models with self-organising criticality as well as

other models developed for earthquake prediction. Moreover,

there have been attempts to use the mathematical theory of

complexity and information theory, as developed by many

scientists among who are Murray Gell-Mann and Claude E.

Shannon, respectively. Since economic phenomena are the

results of the interaction among many heterogeneous agents,

there is an analogy with statistical mechanics, where many

particles interact; but it must be taken into account that the

properties of human beings and particles significantly differ.

Besides, the extreme complexity of social phenomena ensures

that there are also differences in goals and philosophy.

Physicists go for universal laws, while contemporary

economists are driven by relativists’ philosophies of science

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that have gained widespread acceptance such that work in

social science is increasing focusing on change, (ibid.).

There are, however, various other tools from physics

that have so far been used with mixed success, such as fluid

dynamics, classical mechanics and quantum mechanics

(including so-called classical economy and quantum

economy), and the path integral formulation of statistical

mechanics. There are also analogies between finance theory

and diffusion theory. For instance, the Black-Scholes equation

for option pricing is a diffusion-advection equation. Given the

many analogies and overlaps, the range of topics that have

been addressed by physicists traverses many different areas of

economics and finance. The sample includes empirical

observation of regularities in market data, the dynamics of

price formation, the understanding of bubbles and panics,

methods for pricing options and other derivatives and the

construction of optimal portfolios. Broader topics in

economics include the distribution of income, the emergence

of money and applications of symmetry and scaling for market

functioning (ibid.).

Given the many opportunities, Farmer et al (2005)

predicts that in the next few years some physics and economic

departments will design a basic course teaching the essential

elements of both physics and economics, which points to the

possibility of combined honours degree programmes in these

fields. They believe that union of methods of physics and

economics and collaboration between physicists and

economists can add value to the sciences of economics and

physics.

A Mathematical or Economic Science?

Mathematical economics refers to the application of

mathematical methods to represent economic theories and

analyze problems posed in economics by mathematical logic

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and reasoning. It allows formulation and derivation of key

relationships in a theory with clarity, generality, rigour, and

simplicity. Mathematics allows economists to form

meaningful, testable propositions about wide-ranging and

complex subjects which could not be adequately expressed

informally. Further, the language of mathematics allows

economists to make clear, specific, positive claims about

controversial or contentious subjects that would be impossible

without mathematics. Much of economic theory is currently

presented in terms of mathematical economic models, a set of

stylized facts represented in simplified mathematical

relationships that clarify assumptions and implications.

Formal economic modelling began in the 19th century

with the use of differential calculus to describe and predict

economic behaviour arising from small changes in the forces at

play popularly known as the Marginalist Revolution.

Economics became more mathematical as a discipline

throughout the first half of the 20th century, but it was not until

the Second World War that new techniques would allow the

use of mathematical formulations in almost all of economics.

This rapid formalisation of economics analysis alarmed critics

of the discipline as well as some esteemed economists. Their

ranks included John Maynard Keynes, Robert Heilbroner,

Friedrich Hayek and others who criticized the broad use of

mathematical models for representing human behavior,

arguing that some human choices are irreducible to arbitrary

quantities and/or probabilities. The question then arises, what

happens to the portions of economic analysis to which

mathematics is relevant? Yet, the use of mathematical

representation of economic relationships does not in any way

make economics a mathematical science as Weintraub (2002)

would want us to believe. It only created a discipline

Mathematical economics.

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An Economic Science

In my view, economic is both a theoretical and applied

social science that uses mathematics as one of its languages of

presentation and communication. After all, economics is only

one area of the many applications of mathematics. The

touchstone of science as it is commonly know, is its

methodology not its conclusions. The scientific method is what

makes science respectable. But the scientific method also has a

serious draw back in that it is not capable of studying

everything. In its narrow interpretation, it entails adherence to

the scientific method as the sole standard; i.e. accepting what it

endorses and rejecting what it rejects, (Erfan Shafey, 1983).

Happily, contemporary methodology of economics is

reasonably compliant to the scientific method. Yet, there are

other sciences that can not adopt the scientific method; cases in

point are astronomy and evolutionary biology. It follows that

the question regarding whether or not economics is a science is

foreclosed.

How Many Economic Sciences?

Some writers ask all sorts of questions. For example,

some ask, why is economics not an evolutionary science

(example (Lapouge, 1897))? Others ask why economics is not

yet a pluralistic science (example Davis (2007)). Still others

ask how can economics be an inductive science (example

Hoover (2008))? These questions are all part of the obloquy

(humiliation) that economic science has been subjected to in

time and through time. The natural fact is that every science

evolves through time (and possibly across space) and passes

through stages of development and economics is no exception.

Economics has developed in a variety of directions –

conceptions, schools of thought, methodology and scope

(disciplines). Beginning as “a science of housekeeping” in the

writings of the ancient Greek philosopher Xenophon to that of

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the Caliphate to political economy as an aspect of moral

philosophy and one of the moral sciences to an independent

mainstream (neo-classical) economics represent extensive

evolution through time.

Precisely wherein economics fall short of being an

evolutionary science is not so plain as Veblen (1898) rightly

noted. Even as in 1897 it cannot be said that economics was

helplessly behind the times, and unable to handle its subject

matter in a way to entitle it to stand as a modern science as

claimed by (Lapouge, 1897). To ask, if economics has reached

a definitive formulation even by 1897 is to be oblivious of the

extensive achievements in economic analysis transforming it

from a topic in philosophy to political economy and into

economic science as we know it currently in conception, scope

and methodology. Agreed the sciences are at different stages of

development, yet, every science stands in need of

rehabilitation as long as it has not reached its summit of

development. Every science is still evolving going through

stages of historical development, breaking new frontiers,

discovering and analysing new and emerging scenarios, and

opening black boxes to investigate details in finer units and

economics is no exception. Economics has evolved in the last

3,000 years or so in the various dimensions and forms it has

been discussed.

The origins of economic science as sketched in Section

2 shows that economic thought has evolved from the

idiosyncrasies of the ancient social concepts of “Household

theory” to economics of the Caliphate to economics of the

modern nation state as we know it currently. And by schools of

thought it has evolved from the ancients disquisition to the

discourses of the Scholastics to Mercantilism to Physiocracy to

the Political Economy to Classicism to Marxian or radical

(Socialist) economics to Geo-classical economics to the

Austrian school to Marginalism to Institutionalism of the

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Americans to Keynesian interventionist economics to

neoclassical synthesis to Neo-Classical economics to Post-

Keynesian economics to the modern Austrian school to

Foundational economics to the heterodox school to economic

methodology (neo-positivism) – Popper, Kuhn, Lakatos,

Feyerabend and Bayesian updating. Economic theory has thus

evolved from mercantilism to neo-positivism. Though,

evolutionary economics does not take the characteristics of

either the objects of choice or of the decision-maker as fixed as

mainstream economics. Rather its focus is on the processes

that transform the economy from within and their implications

for firms, institutions, industries, employment, production,

trade, and growth. The processes in turn emerge from actions

of diverse agents with bounded rationality who may learn from

experience and interactions and whose differences contribute

to the change.

These developments in themselves show that

economics is a pluralistic science in the sense that there are

different schools of thought with different methods for

understanding systems. Further, by the Journal of Economic

Literature classification there are twenty-six (26) broad areas

of study in economics and about 120 disciplines or areas of

specialisation, some of which are further divided. Even if

pluralism is interpreted as a vision of professional interaction

(open systems of thinking and methodology) in research and

pedagogy, this too is a growing phenomenon in economics

analysis in particular in heterodox economics and even

mainstream economics is no longer an exception. If, in

particular, the reference is to analysis of economies as

evolving, socially influenced and constructed, and politically

governed systems and the ways in which economic thought is

affected by and affects the dynamics of real economies, then,

many branches of economic analyses are pluralistic. Thus, it is

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pertinent to ask, how else could a science be evolutionary and

pluralistic?

Clower (1994) is an indictment of economists who

teach any kind of "pure" theory whether it is microeconomics

or macroeconomics, where pure theory is defined as the

axiomatically-based neoclassical approach to economic

analysis as opposed to "theory" referring to “fact-oriented

creative mixture of intuition, casual empirical knowledge, and

seat-of-the pants logic that is found in virtually all "applied

economic analysis" and, indeed, in virtually everything called

"economics" before 1950.” Even though, the notion

"economics" is polyhedral; encompassing economic system,

economic science (theory) and economic policy; the primary

notion of economics is mostly empirical, experienced, which

forms under the influence of, the mass media, in which it is

said about the prices, income, salary, satisfaction, need for

goods and service that are equated to economics.

Reiss (2008) while agreeing that economics is awash in

data, and the vast majority of published articles are empirical is

never the less agitated by the question, how economics can be

made into an evidence-based (or at least a more evidence-

based) science? In a nutshell Reiss (2008) was speaking to the

limitations posed by the evidential base of economics, in

particular, the possibility of the defeasibility of prima facie

evidence, the relativity of evidence to particular purposes, and

the issue of values in data design and construction with

implications for results, interpretation and uses. This is well

known and acknowledged and is being tackled vigorously by

methods that go beyond the natural or historical

experimentation to the methodologies of experimental

economics. Thus, the prospects for evidence-based economics

are great as Reiss himself realises. Even if, economics science

tends towards the epistemic dimension of science i.e. the

collection of knowledge for its intrinsic sake, econometrics has

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a role in drawing economics into a more non-epistemic or

applied direction.

Data, however, do not speak for themselves with

implications for the claims to knowledge meaning that even if

tentative or mere conjectural, some form of theoretical account

is required. In other words, data need to be understood with

respect to their properties, interpreted for what they stand for

and their formation explained. These raise issues regarding the

two principal approaches to explanation, namely, deductivism

(methods of a scientific abstraction – from the general to

individual or particular cases) and inductivism (history and

logical approach – from individual or particular cases to the

general).

Fortunately, these procedures are not as mutually

exclusive as it is sometimes thought. Rather, deductivism and

inductivism complement and reinforce one another.

Admittedly, while mainstream neoclassical economics

practices largely deductivism, econometrics and case studies

endorse inductivism beyond approving of empirical testing of

the conclusions of a priori theories (deductivism). In practice

induction adds weight to the conclusions of a priori theory or

forces it to reformulate (see Figure 10). After all, Boylan and

O'Gorman observed "Description, theory and observable

causal webs are domiciled in the epistemic domain of science,

and explanation is housed in the non-epistemic domain." Thus

one can picture a 'scientific' continuum, and at one end of the

scale pure epistemic science, and at the other end is the non-

epistemic or applied sciences. One might now ask where

economics lies on this continuum? Further, in time and space,

both historical experiments and methodological advances in

areas such as data mining, panel data construction, and

experimental economics are ever expanding and deepening the

database for economic analysis. Agreed, the wider and deeper

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and more prima facie the database is the better for economic

analysis.

A Bankrupt Science?

Is economics broke, insolvent, ruined or busted?

Beginning in the 1970s with the breakdown of the postwar

Keynesian paradigm (see Coleman, 2003), titles such as

“Economics: A Bankruptcy Science?” (Klamer, 1989); “The

Death of Economics” (see Ormerod, 1994); “The “Principles

of Economics: Some Lies My Teacher Told Me” (see Boland,

1995); “The Decline of Economics” (Cassidy, 1996); “Against

Economics” (see Kanth, 1997); “Debunking Economics”

(Keen, 2001); “The Economy and the Economics Profession –

Both Need Work” (Bergmann, 200x)33

and “Why Economics

is Bankrupt as a Profession – an Explanation” (Paul Krugman,

2009) among others began floating. Also, one meets these

kinds of reactions in staff clubs and street corners, where

economics and economists are held responsible for everything

wrong in the economy and in the lives of people, who had

failed in one sense or another. All these imply that economics

as a science is bane. But, is economics that “harmful” or

“pernicious”? It needs be said, that every science has its areas

of worries depending on its level of development. Any science

that has no concerns has outlived its usefulness and should be

buried. It is comforting to note that all the contents of the

above titles added together, the answer to the above question is

in the negative. Intriguingly, none of the above titles speak to

what their title implies, except perhaps for Bergmann, (200x).

Ormerod (1994) does not imply that the study of

economies is not of great importance but rather he argues that

conventional economics (neoclassical orthodoxy) offers a

33 Cited in Colander, 2008.

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misleading view of how the world operates and needs to be

replaced. This is simply an opinion. There is nothing wrong in

preferring a particular approach to an issue or holding on to a

view in a social setting. There are different ways of viewing

economic events in a social world but to insist that one’s view

is the only correct way is arrogance.

Economics and economists are criticized and critiqued

on different counts from both inside and outside. Worse still

even economists criticise each other. Most intriguing is that

even some of the “Big Wigs” of the profession are themselves

criticizing and critical, their ranks include Fredrick Hayek,

John Hicks, Robert Heilbroner, Mark Blaug, McCloskey and

most recently Barbara Bergmann and Paul Krugman among

others. Hayek in his “The Pretence of Knowledge” asks

whether there really has been steady cumulative progress as

economic laws are discovered and improved empirical

methods introduced. His own work on microeconomics made

him extremely doubtful. Caldwell (2003) echoes Hayek in

believing that the most that economists, like other social

scientists, can hope to achieve is pattern predictions. But, that

in itself is a major achievement.

Mainstream neoclassical economics is criticised for

being a 'closed system', i.e. as a science which maintains a

restrictive interpretation of the economic aspect of reality, and

therefore ignores nearly all the potentials to the opening-up

process of this aspect. The features of this restrictive

interpretation of reality in economics - which interpretation has

its root in the humanistic idea of the autonomy of human

reasoning - are 1) the adherence to formality and types of

functionality and causality, which belong to the natural

sciences (to obtain so-called 'neutral' scientific statements

about 'objectively determined laws'); 2) the transformation of

living subjects to atomized individuals, loosened from their -

normatively qualified - societal structures; 3) a deliberate

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restriction of the field of knowledge to those 'facts' which are

open to a positivistic approach; 4) the elimination of any

anticipation to the other normative aspects of reality; 5)

rational choice theory in economics makes unrealistic

simplifying assumptions about human nature and does not

capture the importance of human rights and concerns for

distributive justice; and 6) essentially, the "first-best"

neoclassical analysis fails to properly account for various kinds

of general-equilibrium feedback relationships that result from

intrinsic Pareto imperfections among others.

First, a theory is not supposed to be tautological

reproducing reality. It will simply be boring. It should,

however, be a reasonable metaphor of reality. It follows that

assumptions can only approximate reality. Besides,

mainstream academic economics is far from being the only

source of modern economic ideas and methodology. Further,

policy is a normative judgment of what is (the extant world) in

the negative, i.e. the extant world is judged not good enough.

This invariably implies the existence of some Pareto superior

states to the extant state. In other words, there is room for

Pareto improvement and more importantly that a Pareto

optimal state is yet to be achieved. This fact motivates the

search for not just a Pareto optimal state but the “bliss

solution” – i.e. a state in which society is reconciled into a

‘happy state’. Therefore, policy making, implementation,

effectiveness and outcomes may be viewed as a journey

from what is to what ought to be. Thus, policy is a campaign

for change, hopefully for the ‘best’. So, the critical issue or

question to pose is what is the knowledge base about the

extant state? This is where science fits into the schema to

provide explanation and by implication predict consequences.

The development of economic science shows in many

respects one or more of these features. This can be illuminated

by the transition from scholastic economic thought to the

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approach of the classicists – which latter, for instance, tries to

make the idea of a just price into an empty formula, and

interprets the idea of 'economic surplus' in an utilitarian

manner as an aggregation of individual atoms of happiness (the

greatest happiness for the greatest number). Another

illustration is the classic doctrine of the 'circle of data'.

Economic data are chosen in a very concise way, namely to

restrict the economic inquiry to market- and price- phenomena;

which can be made accessible to types of analysis that are

purely based on ideas of mechanical functionality and

causality, with or without an appeal to the probability-calculus.

The result of such an approach is that economic effects outside

the market - for instance disturbances to human health and

environmental qualities by air and water pollution - are

excluded from the field of knowledge of 'pure' economic

theory. But there are still more far-reaching consequences.

Economic theory itself has to face the challenge of a

disintegration of its theoretical foundations, because the whole

range of economic data is staggering.

Given the growing complexity of modern economy, the

classic data (human preferences, nature, technical knowledge,

and so on) are so deeply influenced by economic influences,

that they can in fact no longer be used as real starting points

for any economic analysis. Economic science is therefore

confronted with a dangerous crisis of its foundations, which

has its root primarily in its restrictive 'closed' set up. It is

argued, this crisis takes the form of a dilemma between a

borderless extension of economic theorising, stimulated by the

desirability of a 'full' explanation of economic data, on the one

hand, and the rejection of the universal validity of

mathematical and physical causality-types in social sciences on

the other hand. However, any explanation of an event assumes

causality of some sort, realised or not. The idea of causality in

economic science, which is orientated towards the normative

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structure of the economic aspect of reality, is not out of place.

Any other choice will probably lead to a real loss of internal

unity in economic science, and will pull down any real

resistance against the invasion of full pragmatism in economic

theory.

Further, some remarks have been made about the

damaging influences of restrictive economic theorising for the

development of human society. Among these influences can be

mentioned: the wrong interpretation of business enterprise as a

unit of organisation of mere 'factors of production'; the

devaluation of the evil of inflation to a mere 'technical'

engineering problem for economic 'experts'; the interpretation

of market-transactions as 'ethically-neutral'; the lack of balance

in human civilization between the desire for market goods and

scarce non-market-goods, which lack of balance has caused a

disharmonious over-exploitation of non-priced natural

resources, which have been treated as having no economic

value at all.

There is the issue of increasing rigour and discontent,

which is a paradox. Some say economics is not scientific,

others argue it should be scientific, and yet, still others say it

should not be rigorous. Mainstream neoclassical economics

is criticized for being axiomatic deductive proposition based on Bourbakian mathematics, specifically real analysis,

deductive proofs, theorems and lemmas. For this reason Blaug

(1997) thinks, modern economic analysis is sick and nothing

more than an intellectual game played for its own sake and not

for its practical consequences for understanding the economic

world. Asserting that economists have converted the subject

matter into a sort of social mathematics in which analytical

rigour is everything and practical relevance is nothing. But, a

different position is possible. The study of abstract idealised

states of the economy is not without its values or usefulness. It

provides most directly normative judgements of institution

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building and the directions for improvement within a

comparative paradigm.

Further, a little reflection shows that the level of

mathematics in economics is dictated by two factors, namely,

the inadequacy of simpler mathematical methods to handle

given problems and the increasing complexity of modern

economy. Tables of numerical examples only speak to the

intuition, provides no proof whereas explanation requires

causality, which motivates the search for appropriate

functionality; the requirement of equal number of equations as

unknowns is a limitation of algebra and the issues of

inequalities and corner solutions make linear programming

relevant; the inability of calculus to handle kinks, holes and

other forms of discontinuity makes set theoretic approaches

relevant. Economic dynamics call for optimal control

techniques and hence calculus of variation. Game theory is an

extremely versatile theory to practical use in economics, in

particular in behavioural economics and insurance. It is indeed

indispensable in the design of public auctions. So, where lays

the problem? Admittedly, there are pitfalls and outright

abuses in the use of mathematics in economics but none of

these invalidate its use in economic analysis. After all,

behaviour, innovation, herd mentality, bubbles, and even

madness can be modelled in equations (Jalex, September 9,

2009). The real issue, then, is not how much mathematics to

use and when, but what kind and where. Mathematics is

essential to science and a very useful tool in describing the

universe, in particular, if used appropriately and sensibly.

The mathematical theory of statistics has been

revolutionized. New and rich stores of statistical data have

come into being, and an impressive body of empirically

derived generalisations about economic life and its vicissitudes

has been developed. The gain in analytic and computational

equipment and tested knowledge has been considerable, but

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the knowledge gained is still judged woefully inadequate to

meet society's needs. How can the standard of living of the

masses be raised? By what devices can a free society maintain

a high and steadily rising level of employment? What are the

economic prerequisites of permanent peace and how can they

be realised in practice? To these fundamental and many other

socioeconomic questions such as inequality, poverty and

suppression or discrimination, economists continue to give

conflicting answers. Thus, it is not surprising that the issue of

‘a just Nigerian society’ was the worry of Okowa (2005).

Most of the criticisms of economic science have their

origins in epistemological and methodological grounds as well

as in its capacity to express the deep socio-political and

economic mutations through time and space (see Bucur

(200x)). However, the criticisms are not new. From its

beginning, the methodology of economic science has been

debated. They are echoes of criticisms that were directed

against political economy, Ricardo [1772-1823] and Mill

(1773-1836) and then neoclassical economics from its

beginnings with Walras (1834-1910), William Jevons (1835–

82) and Carl Menger (1840–1921) among others. But, the

pertinent question is, would the world be much better off

without economics? This question really centres on the social

relevance of economic analyses, which in turn borders on

methodological issues as well as in its capacity to express the

deep socio-political and economical mutations in time and

across space as noted earlier. Yet, all the criticisms of

economics added together, the answer the above question is in

the negative. Many of the titles mentioned above and the many

others not mentioned simply claim that economics as an

academic field fail to speak to the actual, daily, fruit-selling,

labor-buying, contract-making economy by the language and

communication framework it uses whereby the meaning of the

message in economics has been left aside and sadly enough,

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the economist has not much to say at that point. Protesting

does not help either.

True, in the 1970s, economics had serious problems;

neither theory nor empirical work was on solid footing. But,

what was required was adjustment of conceptual and analytical

(theoretical) framework; re-examination of some its postulates

and assertions; and opening up to political and social relations

within the social context the economy operates. Happily,

modern economics has responded positively to many of the

criticisms levelled against economics and economists. Modern

economics as Colander (2008) puts it, is plurodoxy – an

eclectic mix of approaches that includes traditional

neoclassical microeconomics, game theory, high-tech data

mining, mechanism design, behavioral economics,

experimental economics, association of cultural economics

(ACE) modeling, and neural economics, just to name a few of

the many research programmes. Economics has become an

essential tool for understanding the complexities of modern

society. What defines modern microeconomics is its approach

— one which identifies problems, translates them into

incentive-based models, and takes the models to the data

within a milieu of natural experiment, or designing a lab or

field experiment or some combination of these. Further,

macroeconomics now analyzes more than just the monetary

forces that have shaped societies. Macroeconomic science and

macroeconomic engineering had become better integrated for

practice in the recognition that practice without theory is blind

and theory without practice is empty.

The Economists’ Way of Thinking

Every field of study has its own language and its own

way of thinking. Mathematicians talk about axioms, integrals,

and vector spaces. Psychologists talk about ego, id, and

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cognitive dissonance. Lawyers talk about venue, torts, and

promissory estoppel.

Economics is no different. Supply, demand,

opportunity cost, elasticity, comparative advantage, consumer

surplus, deadweight loss are part of the economist’s lexicon.

These and many other terms and some familiar words that

economists use in specialised senses are often encountered. For

the uninitiated, this new language may seem needlessly arcane.

But, its value lies in its ability to provide a new and useful way

of thinking about the economic world in which we live in a

special way. Economics is an observational/experimental

social science that utilise the logic of the scientific method to

examine how individuals and the economy works. Its interface

with mathematics reflects developments in both mathematics

and economics and in the professional communities over time.

The respective histories of these disciplines are intertwined, so

that both developments in mathematical knowledge and

changing ideas about the nature of mathematical knowledge

affected changes in the methods and concerns of economists

and affects their culture, in particular their language. The

converse is also true and in particular with applied

mathematics but there could be no applied mathematics

without pure mathematics.

Thinking like economists simply asks a number of

questions. How do economists process economic facts? What

principles do they use? What insights do they gain? And how

do their insights influence public policy debates for the good

of the whole? A fundamental belief in economics is scarcity

meaning that the desire for resources to meet human wants is

relatively inadequate. The consequences of this are individual

choices and social competition as summarised in Figure 11.

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Another belief is that economic agents are rational

persons, i.e. they have an objective function aimed at

achieving the best or the greatest value and furthermore their

behaviour is goal directed, namely, purposeful. This is why

economics train you to be mindful about the choices that you

make and advise you to evaluate the cost of individual and

social choices. Examine and understand how certain events

and issues are related and you are well advise to consider the

cost-benefit of each activity or decision when making

decisions, since trade-offs are involved. An individual (or a

firm, or a society) should take an action if, and only if, the

extra benefits from taking the action are at least as great as the

extra costs. If the marginal benefit exceeds the marginal

cost, then jump at it!

Models in Economic Analysis

Economists as scientists try to address their subject

with a scientist’s objectivity. They approach the study of the

economy in much the same way as a physicist approaches the

study of matter and a biologist approaches the study of life.

They devise theories, collect data, and then analyze the data in

an attempt to verify or refute their theories. This is not to claim

that economists work with test tubes or telescopes. The

Figure 11: Economists Basic View of the World

Source: Joseph Henry Vogel, 2009

Economics: Studying

Choice in a World of Scarcity

Wants vs Resources

Social Competition Individual Choices

114

essence of science, however, is its methodology — the

dispassionate development and testing of theories about how

the world works. Thus, the Scientific Method involves

observation, theory, and more observation and continued

testing. This method of inquiry is as applicable to studying a

nation’s economy as it is to studying the earth’s gravity or a

species’ evolution. As Albert Einstein once put it, “The whole

of science is nothing more than the refinement of everyday

thinking” (see Vogel, 2008)

However, economics is not a natural science such as

physics, so most people are not accustomed to looking at

society through the lens of a scientist. How then do economists

apply the logic of science to examine how an economy works?

Assumptions play an important role in all fields of analyses

including the natural sciences. They greatly simplify the

complex of reality and make it easier to understand without

substantially affecting the answer. A fundamental assumption

in economic analysis is the scarcity principle also called the

“No-Free-Lunch” principle. It means that although there are

boundless human needs and wants, the resources available to

meet them are limited. So having more of one good thing

usually means having less of another. This is the significance

of the necessity for choices in Figure 11 and the social

competition and tension that arise therefrom. It should be

noted that economists use different assumptions to answer

different questions when studying the short-run and long-run

effects of changes in economic variables.

Just as secondary school biology teachers teach basic

anatomy with plastic replicas of the human body containing all

the major organs — the heart, the liver, the kidneys, and so on

or as geographers use the map of the world for the physical

description of planet earth. Economists also use economic

models, which show in a simple way how the important parts

of the economy fit together and produce the observed patterns

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or outcomes. But, unlike a biology teacher’s plastic model, the

economists’ models are most often composed of equations and

their images in diagrams. No one model includes all features of

what is being modelled; usually some (irrelevant) details are

assumed away. Therefore, all models are true and false at the

same time but some are very useful.

One good example of a model is the concept of

production possibilities frontier (curve), [PPF = PPC] concept,

which illustrates the concepts of economic efficiency,

tradeoffs, opportunity cost and economic growth. In economics

benefits are measured as the difference between the maximum

you would be willing to pay for something rather than do

without it and the subjective value you place on that thing

called economic surplus. The measure of cost is not just the

financial cost of what is bought or done. But, rather the

opportunity cost of an activity, which is the value of the next-

best alternative that must be forgone (sacrificed) in order to

undertake the desired activity. The choice criterion, therefore,

1000

700

800

Quantities of

Arms Produced

Quantities of

Food Produced

300

2200

B

C

• D

Production Possibility Frontier

Figure 12: Scarcity, Choice, Trade-off and Efficiency

1000

3000

A

o 2000

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is choosing those actions that generate the largest possible

economic surplus. Sometimes people don’t behave rationally,

but economics can help them to make better decisions. Since

some actions involve sacrifices that are not visible or implicit,

some people do not accurately account for cost of an action by

ignoring these hidden or implicit costs. Such actions make for

inefficient decision.

An outcome is said to be efficient if the economy is

getting all it can from the available scarce resources. Points on

(rather than inside) the PPF represent efficient levels of

production. When the economy is producing at such a point,

say point B, there is no way to produce more of one good

without producing less of the other. Point A represents an

inefficient outcome. For some reason, perhaps widespread

unemployment, the economy is producing less than its full

potential from the available resources. It is producing only 300

units of arms and 1,000 units of food. If the source of the

inefficiency were eliminated, the economy could move from

point A to point B increasing production of both arms (to 700)

and foods (to 2,000).

The unrealistic bit of the PPF in Figure 12 is that real

economies produce millions of goods and services but Figure

12 imagined an economy that produces only two goods —

arms and foods. Together the arms industry and the foods

industry use all of the economy’s factors of production. The

PPF is a graph that shows the various combinations of outputs

— in this case, arms and foods — that the economy can

possibly produce given the available factors of production and

the state of technical-know-how (technology) that firms can

use to transform the factors of production into outputs. In this

theoretical economy, if all resources were fully utilised in the

arms industry, the economy would produce 1,000 arms and no

foods. If all resources were used in the foods industry, the

economy would produce 3,000 units of foods and no arms. The

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two end points of the PPF represent these extreme possibilities.

In between these extreme points are infinite possibilities of

different combinations of arms and foods to be produced

utilising all available resources. For example, if the economy

were to divide its resources between the two industries, it

could produce 700 cars and 2,000 units of food, shown in the

figure by point B. By contrast, the outcome at point D is not

feasible because available resources and technology cannot

sustain production at that level. The economy does not have

enough factors of production with the technical-know-how to

support that level of output. In other words, the economy can

produce at any point on or inside the production possibilities

frontier, but it cannot produce at points outside the frontier.

The limitations of models, notwithstanding, they are

used to examine various economic issues with underlying

assumptions. Another important example is the circular-flow

diagram. The economy consists of millions of people engaged

in many activities — buying, selling, working, hiring,

manufacturing, and so on. To understand how the economy

works, we must find some way to simplify our thinking about

all these activities. In other words, we need a model that

explains, in general terms, how the economy is organised and

how participants in the economy interact with one another.

Figure 13 presents a visual model of the economy, that of a

circular-flow diagram. In this model, the economy is

simplified to include only two types of decision-makers —

households and firms. Firms produce goods and services using

the four broad categories of factors of production, namely,

labour, land, capital (buildings and machines) and

entrepreneurship. It is further assumed that households own the

factors of production and consume all the goods and services

that the firms produce.

118

Figure 13 is a schematic representation of the organisation of the economy. Decisions are made by households and firms. Households and firms interact in the markets for goods and services (where households are buyers and firms are sellers) and in the markets for the factors of production (where firms are buyers and households are sellers). The outer set of arrows shows the flow of money (naira), and the inner set of arrows shows the corresponding flow of inputs and outputs. The circular-flow diagram offers a simple way of organising all the economic transactions that occur in the two-sector model between households and firms in the economy. A more complex and realistic circular-flow model of the economy would include, for instance, the roles of government and international trade. Even such a model still provides only a simplified view of the economy, dispensing

Income

Market

for Goods

&

Services

Inputs for

Production

Goods &

Services

bought

Goods &

Services

sold

Labour,

Land &

Capital

Spending Revenue

Market for

Factors of

Production

Wages, Rent, Interest & Profit

Figure 13: Circular Flow Diagramme of the Two-

Sector Model of the Economy

Households Firms

119

with details that, for some purposes, are significant. Yet, details are not always crucial for a basic understanding of how the economy is organised. Given the simplicity of the circular-flow diagram, it is useful to keep in mind when thinking about how the pieces of the economy fit together that some details are omitted.

Levels of Economic Analysis

Many subjects are studied at various levels. For

example, biology is studied at molecular and cellular levels

investigating the building blocks of living organisms while

evolutionary biology studies the many varieties of animals and

plants and how the species change gradually over the

centuries. Economics is also is studied at various levels. The

main divisions are microeconomics and macroeconomics –

concepts borrowed from biology and used in a generic sense.

Microeconomics takes a microscopic view of economic

activities studying decisions of individual households and

firms (in general parts of the economy). In a fuller sense, it

studies the interaction of households and firms in markets for

specific goods and services. While macroeconomics takes a

telescopic view studying the operation of the economy as a

whole, which is just the sum of the activities of all the

decision-makers in all the markets of the economy. Microeconomics and macroeconomics are closely

intertwined. Because changes in the overall economy arise from the decisions of the millions of individuals making-up the economy, it is impossible to understand macroeconomic developments without considering its microfoundations. Despite the inherent link between microeconomics and macroeconomics, the two fields are distinct. In economics, as in biology, it seems natural to begin with the smallest unit and build up. Yet doing so is neither necessary nor always the best way to proceed. Microeconomics and macroeconomics address different questions; they sometimes take quite different approaches and are often taught in separate courses.

120

Another separation in economics consists of positive economics (economics science) and normative economics (policy) corresponding to in philosophy “what is” and “what ought to be”, respectively. This division gives the economist two roles to play – scientist and engineer (the policy advisor), respectively. Positive economics attempts to describe the economic world as it is; while normative economics attempts to prescribe how the economic world should be, hopefully for the better. A key difference between positive and normative statements is how their validity is judged. In principle, positive statements can be confirmed or refuted by examining evidence. In contrast, evaluating normative statements involves values as well as facts such that deciding what is good or bad policy is not merely a matter of science. It also involves our views on ethics, religion, and political philosophy, so there is no straight forward answer. Thus, it is easy to understand why economists have many hands and often disagree with one another. Interestingly, positive and normative statements are related. Our positive views about how the world works affect our normative views about what policies are desirable. Yet normative conclusions are not simply derivatives of positive analysis alone; they involve value judgments as well on how best to improve how the economy works.

According to Shafey (1983) economic knowledge of cause and effect relationships principles tend towards the time-and-place bound guidelines of policy which are modifiable in the light of feedbacks, that is the role of values in the formulation of theory and design of policy. There can be no denial that some values are implicit and unavoidable in the formulation of positive theories (e.g. in the choice of problems and variables). But it does not follow that the analytical distinction between positive and normative economics is dead and useless. There is often a big and clear difference between "what is" and "what ought to be". Normative economics, in its primary concern with "what ought to be" cannot ignore "what is" the actual reality in a given time and place. In other words, normative economics needs theories or positive models by which actual reality can be comprehended, evaluated, and/or

121

steered to bring it closer to the normative model. It has been said earlier, theory without practice is empty and practice without theory is blind.

Do Economics have Useful Past, Present and Future?

Economics science has a twofold aim, namely, first to

accurately describe economic events in both our present and

past social orders and second, to furnish scientific explanations

of these events. Conducting an economic analysis requires the

application of scientific methods to break down economic

events and phenomena into their separate components that are

easier to examine in order to understand their structure

involving 7 steps, namely, (a) identification of appropriate

economic indicators; (b) collection of economic data; (c)

analysis and preparation or selection of an economic model;

(d) interpretation of the results of analysing economic data; (e)

monitoring of intervening forces; attempt verification or

refutation of the postulates or implications of the theories and

(g) using the economic analysis for decision making. It is

decision makers who use the results of an economic analysis

for decision making.

Astute decision makers recognise that economic forces

are uncontrollable and that current strategies may need to be

adjusted to cope with or overcome obstructing economic

changes. They approach with caution opportunities and threats

discovered as a result of economic scanning and analysis. They

pursue a proactive approach, knowing that economic analysis

informs them of how best to choose from alternative

approaches to employ scarce or uncommon resources and

achieve objectives in the most efficient and cost effective

manner. However, it must be noted that decision makers are

largely politicians, i.e. even when they are economic

professionals with focus on political, societal and other

interests in applying economic science and engineering

122

(policy), which tamper with the application of economic

principles in practice. This notwithstanding, it may asked,

what are the uses and possible uses of economic science?

Living entails a wide variety of activities. They include

upbringing, education, medical service, rest, science, culture,

production, distribution (exchange) and consumption. All these

spheres of vital human activities are closely connected and

form a united social system, which can be separated into three

subsystems: socio-cultural, politico-administrative, and

economic spheres. Each of these subsystems is an open system

but is somewhat independent and has its own laws of

functioning. The most important among these systems is the

economic in the sense that it forms the base and provides all

the peoples’ vital activities to satisfy their material and

spiritual needs. The other systems admittedly are supportive

and influential and should not be ignored completely.

The concerns of the early economists involved a

number of issues which they held in common, the answers to

which are the basis of the structure of well-functioning

societies today as much as in their days. These include how to

make markets (in general institutions) work optimally, taxation

policies to best cater for the collective needs of society, and

other monetary instruments transparent and free from

corruption; when is profit permissible (and how much) based

on the labours of others, such as in the case of merchants, the

charging of interest and when does it become unacceptable

usury; and other practices that would otherwise destroy the

well-being of ordinary law-abiding people on which strong

and unified states are built. If this statement has any

credence, then, Malthusian economics is a welcome wake-up

call, alert, and privileged information to avoid a failed state.

The unity, simplicity, and power, even its subtlety,

formality, high analytic thinking and ever increasing rigour

utilising abstract mathematics with proof making

123

(mathematical truths), economics is attributed a leading role

among the social sciences and a prominent position as

contributor to economic and/or social issues in the real world.

Economic principles and methods applied to legal

problems can illuminate and reveal the coherent system of

laws. Economic reasoning can be applied to common law;

property; contract rights and remedies; family and sex laws;

tort; criminal law; jurisprudence; public regulation of the

market; antitrust laws; regulation of employment relations

(labour laws); public utility and common carrier regulation; the

choice between regulation and common law; laws of business

organisations and financial markets; corporations, secured and

unsecured lending and bankruptcy; law and the distribution of

income and wealth; taxation; the transmission of wealth at

death (Will); the legal process; the market, the adversary

system, and the legislative process as methods of resource

allocation; the process of legal rulemaking and legislation into

policy; civil and criminal procedures; law enforcement and the

administrative process; the constitution and the system of

governance; the nature and functions of constitutions; due

process; nation building; racial or any type of discrimination,

tribalism and ethnicity; the protection of free markets in ideas

and religion; searches, seizures and interrogations among

many others. There is economic analysis of legal rules and

institutions including legal regulation of nonmarket behaviour

such as drug addiction, thefts of art, sexual acts, surrogate

motherhood, rescues at sea, flag desecration, and religious

observances; which can be seen as a tool for understanding and

reforming social practices, rather than as a formal system of

daunting mathematical complexity, (Posner, 2002).

In engineering, economics is applied to finesse design

and evaluate the feasibility of engineering projects. Indeed,

this is true of any projects whatsoever. In science, there are

bioeconomics, econophysics, ecology and environmental

124

economics among others. Bioeconomics discusses the vital

issue of the economic value of biodiversity for individuals and

society, while ecological and environmental economics deal

with the economics of nonmarket uncommon resources and

how to balance the desire for them with the desire of market

goods and services. Econophysics is an interdisciplinary

research field, applying theories and methods originally

developed by physicists in order to solve problems in

economics, usually those including uncertainty or stochastic

processes and nonlinear dynamics. Its application to the study

of financial markets has also been termed statistical finance

referring to its roots in statistical physics.

In medicine, there are heath economics, pharmaco-

economics and clinical economics to guide the most efficient

allocation of scarce resources in this social subsector. In all

these subsectors economic analyses are founded on the

principle that choices must be made among alternative uses of

limited resources, and thus decision making in the health care

arena should consider both costs and health benefits (i.e.

improvements in the health status of a target population).

Clinical economic analyses are performed primarily to assess

the health outcomes achieved with alternative health care

interventions relative to the costs involved. The ultimate goal

of clinical economic analysis is to maximize net health benefits

for all persons in a target population given a range of health

care interventions and known resource constraints.

Indeed, there is economics of everything conceivable

including the economics of this lecture. As Levitt and Dubner

(2006) rightly observed “economics is a science of excellent

tools for gaining answers to modern real world issues as

opposed to a subject matter, then no subject, however offbeat,

need be beyond its reach.” In other words, economics science

is applicable to any socio–politico–economic issue – any real

life issue.

125

Vice Chancellor, Sir, permit me to use the first person

I. In 1976, using multivariate regression analysis in executing

my undergraduate research project I showed what was

happening and continuous perhaps till this moment, namely,

the “Dutch Disease”, wherein oil activities even as at then has

begun to crowd out the agricultural sector. Admittedly, at the

end of the 30 months civil war, many variables could explain

the decline in agricultural output. But, the trade-off between oil

and agricultural activities was statistically convincing.

However, it need not be so with astute policy engineering.

Agreed, oil blow-outs and spills will pollute farm lands and

impact negatively on agricultural activities. But, chemical

fertilizers and agro-chemicals such as insecticides and

pesticides – derivatives of oil petrochemicals – are powerful

components of the Green Revolution.

I have heard people say, the Nigerian economy is a

“voodoo economy”, it does not obey any known economic

laws. But, is it in the economy or in the character and style of

the players, who ignore the rules of the games; play rough

before injury time and get red cards from the referees. For

example, those who started with us, Malaysia had increased its

fertiliser capacity by sixfold or more, we had lost even the

little we had and are importing fertilisers worth more than $2

billions (allAfrica.com: Nigeria/stories/200905071001.html)

and food worth on average $3 billion each year (Punch

Editorial Board, Published: Sunday, 27 Dec 2009). Importing

even what we have in abundance. The contradictions are

obvious. The nagging issue of appropriate prices for petroleum

products in the country can be neatly handled by retail margin

modeling.

In 1981, as a graduate student at the University of

Pittsburgh, I showed how using the economic surplus

technique could more accurately measured the social

profitability of public investment in cocoa research. In 1986, I

126

applied these tools to Nigerian investment in oil palm research

taking a total programme perspective and could not understand

why the oil palm industry was declining in Nigeria, while

understanding perfectly, why Malaysia which took her first oil

palm seeds from the Nigerian Institute of Oil Palm Research

(NIFOR) had become the leading exporter of palm produce

exporting more than a million tons of palm oil from which

Nigeria was sourcing her palm produce to satisfy both

industrial and domestic uses.

From the mid-1990s to 2003, when I went on leave

abroad, I represented the Federal Government on a number of

environmental impact assessment (EIA) panels on oil and gas

projects. In those days, the oil companies will proudly talk

about “community assistance”, which did not go down very

well with the economists’ way of thinking. Applying the

opportunity cost perspective, I arrived at ‘community

development’ concept. Today, I am glad to find that

community development, stakeholders and partnership

concepts have become part of the lexicon of EIA studies in the

oil and gas sector.

If the Supreme Court Judges had read my papers on

“Fiscal Federalism”, (1999) and “Resource Control and … the

Market for National Union”, (2001), perhaps their judgement

on the famous resource control suit would have been different.

Of course, the resource control issue was settled politically,

setting the court judgement aside as it were. In a paper with my

darling wife on “Assets Portfolio” selection (1998), we showed

when it is proper to diverse assets portfolio holdings beyond

risk aversion. In 2006, I provided an alternative formula for the

optimal provision of public goods and taxes required for

catering for collective goods. In the same year, working with

my coursemate and friend Professor Cole, we sharpened the

methodology for handling tort issues in Forensic economics.

127

At the Botswana national think-tank, Botswana

Institute for Development Policy Analysis (BIDPA), I infused

economic theory into policy research, analysis and advice

taking it beyond institutional analysis and the results are

marvelous and convincing with practical utility. Using the

economists’ way of thinking, we showed how best to answer

questions regarding agricultural subsidies; options about how

best to use a national abattoir; how to unpack tenders to

unleash the potentials of the indigenous economy of Botswana

by promoting small, micro and medium enterprises (SMMEs)

effortlessly that will in turn generate employment, income, and

skills and competencies for accelerated growth and

development, and hence poverty reduction through engineered

incentive-based mentoring and learning. Applying the same

principles, we showed how the informal sector can be

harnessed into a growth pole and grafted onto the mainstream

national economy for poverty reduction. The list can go on but

the usefulness of economics science and the economists’ way

of thinking had been demonstrated amply.

The Constraints on Uses of Economic Science

First, economists publicly disagree with each other so often that they are easy targets for stand-up comedians. Yet non-economists may not realize that the disagreements are mostly over the details — the way in which the big picture is to be focused on the small screen. When it comes to broad economic theory, most economists agree (over 90%, Alston, R. M., et al., 1992). President Richard Nixon, defending deficit spending against the conservative charge that it was "Keynesian," is reported to have replied, "We're all Keynesians now." In fact, what he should have said is "We're all neoclassicals now, even the Keynesians," because what is taught to students, what is mainstream economics today, is neoclassical economics (see E. Roy Weintraub, The Concise Encyclopedia of Economics).

128

“If all economists were laid end to end, they would not reach a conclusion.” This quip from George Bernard Shaw is revealing. Economists as a group are often criticised for giving conflicting advice to policymakers. President Ronald Reagan once joked that if the game Trivial Pursuit were designed for economists, it would have 100 questions and 3,000 answers. Why do economists so often appear to give conflicting advice to policymakers and debate among themselves? There are two basic reasons:

Economists may disagree about the validity of alternative positive theories about how the world works, which is easy to understand since no one sees at 360

o; each angle of

observation gives a different perspective. Economists may have different values and, therefore,

different normative views about what policy should try to accomplish, which also is easy to understand as policies have differential distribution of benefits and costs.

In other words, economists disagree on the basis of differences in Scientific Judgments. Fortunately, this is not peculiar to economics alone. Several centuries ago, astronomers debated whether the earth or the sun was at the center of the solar system. More recently, meteorologists have debated whether the earth is experiencing global warming and, if so, why. Science is a search for understanding about the world around us. It is not surprising that as the search continues; scientists can disagree about the direction in which truth lies (see http://mankiwXtra.swlearning.com, Chapter 2 Thinking Like an Economist).

Economists often disagree for the same reason. Economics is a young science, and there is still much to be learned. Economists sometimes disagree because they have different hunches about the validity of alternative theories, i.e. about how the world works or about the size of important parameters. Another important source of differences is differences in values that influence answers to many questions, in particular as economists are participant observers. For example, questions about equity have no final answers. Given the possibility of differences in scientific judgments and

129

values, some disagreement among economists is inevitable. For possibilities, debates and disagreement among economists are in fact functional fueling the Kuhnian anomalies that lead to scientific revolutions and progress. Thus, debate and disagree, economists must. Economists’ predictions are not exact, but they do have a method – a systematic way of thinking about the world that is truer than not, that gives them genuine even if imperfect expertise. Because it is a social science, economists have less control over their data than natural scientists. Though true, precision is improving in time. This is not to claim that the error term has become zero in economic equations or random shocks to real economies had vanished; but, because more data and more powerful tools from processing and analysing them had become available. My Submission Vice Chancellor, Sir, all other protocol duly observed my submission to us is that economics with all its infirmities, we shall stop studying and using this beautiful noble life-enhancing science prudentially and creatively at home, in the community, city, district, local government area, state, nation and the world at our own peril. For those studying economics be proud of yourselves for taking that bold step and you are urged to pursue it with vigour and excellence; for those intending, what are you waiting for? You have over 130 roles to play in industry, education, scientific public service and research organisations, self-employment, hospitals, and indeed in any department of human activity. Surprisingly, economics is dismal not because it is dismal but only because Carlyle loved the continuation of slavery. It is bankrupt only because practitioners abuse its principles and methodologies. At this point, I will categorically say that abuse does not invalidate use.

130

Mr. Vice Chancellor, Sir, and this wonderful august audience, I cannot thank you enough for your legendary presence and attention. Kealeboga! Thank you so very much.

Figure 14: I Rest My Case

Source: Ayogu (2009)

131

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